Have EU derivative policy reforms since the 2008 financial crisis been designed effectively?

Abstract

Purpose

In response to the 2008 financial crisis, the European Union (EU) comprehensively restructured its derivative regulation. A key component of this new framework is a reporting obligation for every derivative trade. As the reporting requirement does not involve public disclosure of the information, existing academic analysis on reporting regulations to-date, which focusses on public disclosure, is limited in predicting the effectiveness of the reform. This paper aims to assess whether the reform has been designed effectively based on the regulatory setup in the UK.

Design/methodology/approach

Framing the reporting regulation as a moral hazard problem with asymmetric information, this paper uses a game-theoretical approach to evaluate whether the new derivative reporting obligation effectively induces firm compliance. I also discuss potential extensions of the derivative reporting model, with particular emphasis on how the framework could account for heterogeneous firms and different regulatory tools.

Findings

Based on the theoretical analysis, this paper finds that while firms are unlikely to comply fully with derivative reporting requirements, it is possible to induce relatively high firm compliance. Although this does not mean we are immune from another financial crisis, the derivative reporting requirements should equip EU regulators to monitor a more transparent and secure derivatives market.

Originality/value

This paper provides a theoretical foundation for further study of post-crisis derivatives reforms. In particular, the implications of the model point to an empirical strategy to test the accuracy of the model.

Citation

Graham, C.F. (2021), "Have EU derivative policy reforms since the 2008 financial crisis been designed effectively?", Journal of Financial Regulation and Compliance, Vol. 29 No. 3, pp. 256-279. https://doi.org/10.1108/JFRC-09-2020-0085