7. The Challenges of Regulation of Derivatives

Derivatives are the functional form that speculative capital assumes in markets. The notional amount of derivatives in 2015, as reported by the Bank for International Settlement, was $550 trillion. That number does not include the synthetic derivatives, so it grossly – by a factor of many multiples – underestimates the size of capital earmarked for derivatives-type trading. Speculative capital operating as derivatives is the glue that holds the financial markets together. This chapter explains the nature of that mechanism. We offer no policy recommendations, only a description of the conditions that prevail in the markets and the potential effects of disturbing them through regulation.