A greater push to crack down on the dark-side of derivatives trading?
Earlier this week on December 11, 2015, the SEC voted on a new proposal which aims to protect derivative investors and increase risk management measures, concerning ETFs, mutual funds, and closed-ended funds (to name a few).
So What, Who Cares?
As consumers, we must remain aware of the implications of the financial instruments we are (or might be) investing in!
So, what is this financial instrument that the SEC is imposing new regulations on?
In simple terms, a derivative is a financial instrument whose value is pegged (or derived from) another asset.
What does the dark-side of derivatives actually imply?
While it is no surprise that derivates can pose opportunities for massive monetary gain, we can not ignore the fact that there is a dark-side to derivatives—market risk, liquidity risk, counterparty risk, and interconnection risk. All in all, these risks have the potential to lead to devastating, negative implications like companies going bankrupt or investors losing millions and billions worth of capital.
Even Warren Buffet shed light on the dark-side of derivatives more than 10 years ago in one of Berkshire Hathaway’s annual reports (2002, pg. 14):
“In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Where can I read more about the SEC’s new proposal?
Read more about the SEC’s new proposal to regulate derivates and to increase risk management measures.
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