More regulation of derivatives is being contemplated by Washington, whereby trades will have some form of collateral and will include margin. What was transacted in the past obviously did not work satisfactorily. But then, there was little regulation, nor collateral required.
There is no doubt that derivatives are essential to trading of securities for any orderly financial securities market. Derivatives are financial instruments derived from other assets, instead of trading the underlying asset itself. One basic example is a futures contract: An agreement to exchange an underlying asset at a future date.
Derivatives are frequently leveraged, so that a small movement in the underlying value can cause a large difference in the value of the derivative.
They can be used to speculate for profit or to hedge in order to reduce risk in that underlying asset.
Regulators are attempting to create more collateral backing for these contracts, to avoid past problems. This makes theoretical sense.
But I wonder how practical such efforts will be, as the nature of derivatives may make such restrictions too binding to be practical.
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