Chiara Oldani - Governing Global Derivatives: Challenges and Risks

GOVERNING GLOBAL DERIVATIVES

Edited by
John Kirton, Munk Centre for International Studies, Trinity College, Canada,
Michele Fratianni, Indianna University, USA and
Paolo Savona, LUISS University, Italy

The intensifying globalisation of the twenty-first century has brought a myriad of new managerial and political challenges for governing international finance. The return of synchronous global slowdown, mounting developed country debt, and new economy volatility have overturned established economic certainties. Proliferating financial crises, transnational terrorism, currency consolidation, and increasing demands that international finance should better serve public goods such as social and environmental security have all arisen to compound the problem.

The new public and private international institutions that are emerging to govern global finance have only just begun to comprehend and respond to this new world. Embracing international financial flows and foreign direct investment, in both the private and public sector dimensions, this series focuses on the challenges and opportunities faced by firms, national governments, and international institutions, and their roles in creating a new system of global finance.

Also in the series

Financing Development
The G8 and UN Contribution
Michele Fratianni, John J. Kirton and Paolo Savona
ISBN 978-0-7546-4676-1

The New Economic Diplomacy
Decision-Making and Negotiation in International
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The G8 System and the G20
Evolution, Role and Documentation
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ISBN 978-0-7546-4550-4

Full listing at the back of the book.

Challenges and Risks

Chiara Oldani
University of Viterbo La Tuscia, Italy

First published 2008 by Ashgate Publishing

Published 2016 by Routledge
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Copyright 2008 Chiara Oldani

Chiara Oldani has asserted her moral right under the Copyright, Designs and Patents Act, 1988, to be identified as the author of this work.

All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

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British Library Cataloguing in Publication Data
Oldani, Chiara
Governing global derivatives: challenges and risks.
(Global finance series)
1. Derivative securities 2. Derivative securities - Law and
legislation
I. Title
332.6'32

Library of Congress Cataloging-in-Publication Data
Oldani, Chiara.
Governing global derivatives: challenges and risks / by Chiara Oldani.
p. cm. -- (Global finance)
Includes bibliographical references and index.
ISBN 978-0-7546-7464-1 (hardback) 1. Derivative securities. I. Title.

HG6024.A3O43 2008
332.64'57--dc22

2008022322

ISBN 9780754674641 (hbk)

Chiara Oldani, born in Rome in 1975 and married to Andrea, has a PhD in Economics and Finance (Tor Vergata University, Rome); is currently Assistant Professor at the University of Viterbo "La Tuscia" and is a columnist for a leading Italian economics newsmagazine since 2005. She graduated magna cum laude at Luiss G. Carli University (Rome, Italy) and obtained a Master of Science in Economics at Warwick University (Coventry, UK). She spent part of her PhD at the Finance Department of the Wharton School of the University of Pennsylvania (USA), and visited the Cambridge Endowment for Research in Finance (UK) in 2007. She has been an economist at the Italian Institute of Economic Analysis, has won many scholarships and devoted most of her professional effort toward the study of derivatives. She has been teaching economics at undergraduate level at Luiss G. Carli University in Rome since 2002, and published her first book on derivatives in 2004.

Derivatives world markets involve resources that are more than 10 times bigger than world GDP. Despite their size, the literature has devoted very little attention to their global effects, which materialized in a very negative and unexpected way in 2007. Apart from their size, these securities play a special role in the present international financial structure, which is highly deregulated and where there is little compensation for risks. Derivatives, as with other innovative financial securities in the history of economics and finance, deserve our attention because they contribute to modify the world financial system. The dominating finance theory relies on a perfect market hypothesis and considers the free market as the best scheme to design an efficient system; however, the perfect market hypothesis holds when rules and markets players are homogenous, which we will see is unfortunately not our situation.

Derivatives have been traded in the world financial system since the ancient Mesopotamian empire, 1,700 BC, when commodity-related risks were hedged by means of forward-future types of contracts, whose details and working were not very different from those traded today. The amazing dimension and growth of the world derivatives market can be demonstrated in a few figures: according to the BIS Triennial Survey released in December 2007, the average daily turnover of traditional foreign exchange derivatives has grown by an unprecedented 71 percent rate since April 2004, reaching US$4.2 trillion, which corresponds to an annual 20 percent increase; the average daily turnover rose by 65 percent in the same period. This increase was much stronger than the one observed in the previous survey, between 2001 and 2004. What is interesting to emphasise is that the composition of turnover by counterparty changed substantially. Transactions between reporting dealers and non-reporting financial institutions, such as hedge funds, mutual funds, pension funds and insurance companies, more than doubled between April 2004 and April 2007 and contributed more than half of the increase in aggregate turnover.