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The purpose of this paper is to investigate factors that safeguard or hinder the proper use of derivatives, with evidence from active users and controllers of derivatives.

An online panel of 420 users and controllers of derivatives responded to a self‐report questionnaire that was purposely designed for the present study. Exploratory factor analysis was used to guide scale construction and the resulting factor scores were examined overall and across four demographic variables (gender, experience, education, position held with firm).

Factor analysis provided support for the five hypothesised dimensions of proper derivative usage: Risk management controls; Misuse; Expertise; Perception; and Benefits. Summary statistics of the factor scores revealed that the respondents agree that: they are giving proper attention to risk management controls; factors such as greed, politics, inappropriate standards and inadequate controls encourage misuse; they are capable of dealing with derivatives even in complex situations; derivatives are valuable financial instruments; and they are aware of the benefits derivatives provide to firms, when properly handled. However, some respondents reported contrasting views while the respondents' education, position held and experience with derivatives produced a significant impact on the factor scores. The implications of the findings are discussed.

This study provides a better understanding and assessment of five factors that affect the proper use of derivatives and addresses practical recommendations aimed at ensuring that the true values and qualities of the derivative instrument are not obscured.

Derivatives are nowadays widely used globally both for speculative and hedging purposes. However, as experience shows, inadequate use of derivatives may cause severe problems and even bankruptcy of firms. Thus, it is essential to help organizations design a robust proactive governance and internal control structure, which will help to prevent new financial debacles and scandals when using derivatives. Taking into account the frequent use and the growing fraud caused by derivatives, the aim of the paper is to identify considerations for internal control important to ensure better governance of firms using derivatives. The main findings are based on an analysis of interviews that were conducted with experts directly or indirectly involved with derivatives from different European countries. The interviews were semistructured following the approach proposed by Patton (1990). An analysis of the data collected from the interviews was carried out using a thematic approach. The paper identifies and analyzes the main “sources” of derivatives misuse, including poor design and mis-categorization of instruments, convenience to blame derivatives, unsophisticated players, insufficient regulatory environment, poorly designed internal controls, inadequate communication, poor firm culture, etc. It also provides an extensive analysis of the main recommendation for internal control concerning awareness of derivatives design, the human aspects, regulations, communication, knowledge, and training. Sound internal controls could avoid new debacles without adding other restrictions to the market. Moreover, it provides recommendations for internal control important to ensure better governance of firms using derivatives.

This study challenges the conventional theoretical approach of the ‘Three Lines of Defence’ Model adopted by most of the Maltese credit institutions. The authors propose a paradigm shifting conceptualised framework that would alter the corporate governance structures of banks. The objective is to test the feasibility and willingness of credit institutions to adopt such an approach.

This study challenges the current practices of the internal auditing profession and organisations and invites them to evaluate their structures whilst recognising the benefits of adopting a combined assurance function.

In order to test this hypothesis, the authors sought out semi-structured interviews with controllers (Internal Auditors, Risk Managers and Compliance Officers) within Maltese Credit Institutions, varying in size from significant, medium-sized and small institutions; personal from the Malta Financial Services Authority – The regulator, the Big four audit firms and members of the Malta Forum of Internal Auditors, and practitioners working both within and outside the financial industry.

There were two contrasting opinions regarding the suggested proposition. On the one hand, those operating within the credit institutions, as well as the regulator and the external auditors, do not believe that the proposition of integrating risk, compliance and internal audit functions (IAF) in one team would be possible; the reason being that independence, which is the cornerstone of every IAF, would be severely impacted. On the other hand, there were those practitioners working outside the banking industry but with sufficient experience and knowledge in the field, who challenged the traditional concept of independence. They argue that the functions should not be separate from each other because they have much in common.

Four themes emerged from the study: (1) challenges as a concept, (2) benefits, (3) risks and (4) condition for successful implementation. All interviewees, from risk departments, boards, external auditors and regulators agree that a strong, knowledgeable and independent IAF is fundamental to every organisation but more so within the financial industry. Nevertheless, this study revealed two schools of thought that emerged from the findings in relation to the IAF and its regulation, and specifically, when the authors presented the proposition of an integrated function.

This paper aims to examine the risks associated with smart contracts, a disruptive financial technology (FinTech) innovation, and assesses how in the future they could threaten the integrity of the global financial system.

A qualitative approach is used to identify risk factors related to the use of new financial innovations, by examining how over-the-counter (OTC) derivatives contributed to the Global Financial Crisis (GFC) which occurred during 2007 and 2008. Based on this analysis, the potential for similar concerns with smart contracts are evaluated, drawing on the failure of The DAO on the Ethereum blockchain, which involved the loss of over $60m of digital currency.

Extensive use of bilateral agreements, complexity and lack of standardization, lack of transparency, misuse and speed of contagion were factors that contributed to the GFC that could also become material concerns for smart contract technology as its adoption grows. These concerns, combined with other contextual factors, such as the risk of defects in smart contracts and cyberattacks, could lead to potential destabilization of the broader financial system.

The paper’s findings provide insights to help make the design, management and monitoring of smart contract technology more robust. They also provide guidance for key stakeholders on proactive steps that can be taken with smart contract technology to avoid repeating the types of oversights that contributed to the GFC.

This paper draws attention to the risks associated with the adoption of disruptive FinTech. It also suggests steps that regulators and other key stakeholders can take to help mitigate those risks.