Derivatives are difficult to understand and challenging to value. The surge in derivatives litigation and regulatory enforcement actions after the financial crisis offers a stern reminder that misusing these financial instruments can lead to substantial damage.
At a glance
- Derivatives are an effective means of transferring risk—but they do not make risk disappear.
- The numbers of collateralized debt obligations (CDOs) and credit default swaps (CDSs) cases grew sharply in 2009 and 2010, and CDSs have been blamed as one of the root causes of the crisis.
- Market participants are likely to view the next round of innovative derivatives with greater skepticism—at least, one should hope so.