Derivatives Regulation in the Context of the Shingle Theory

Friday, January 1st, 1999 at 12:00 am by Allen D. Madison
Allen D. Madison, Derivatives Regulation in the Context of the Shingle Theory, 1999 Colum. Bus. L. Rev. 271

Since 1994, there have been various announcements of financial losses involving derivatives. Despite the publicity of these announcements as signaling a problem with the manner in which financial derivatives are regulated, federal legislators have done little about the possible problem other than shuffle paper around. George Soros warned Congress directly that it had an obligation to regulate derivatives because it will be obligated to “preserve the integrity of the system” if there is a “meltdown.” One of Soros’ concerns in issuing this warning is that derivative instruments are often used to avoid regulation. Although derivatives are “specifically designed to enable institutional investors to take gambles which they would otherwise not be permitted to take,” it appears that, because of abusive sales practices of dealers, the investor may not always realize it is taking such a gamble. This Article focuses on the regulation of derivatives sales practices. Improvement in the regulation of sales practices would help protect the integrity of the system by limiting the opportunity to mislead or otherwise trick derivatives purchasers into making risky bets with other people’s money.

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