Trading Derivative – Who Regulates Derivative Trading?

15.03.2013

Derivatives are truly considered the financial contracts that have been created in a pattern to show leverage and it is a method that allows you to have a great investment by utilizing some very little money. It also facilitates in alleviating the risk just as do the policies for insurance. Contracts for derivative are complicated enough to understand. It often happens that the investors feel helpless and they find it hard to know the amount of investment and the nature of risks involved in such type of investment. Both the government agencies and the private institutions exercise their rights to regulate the derivative contracts. It is done in order to regulate reliability of the respective market.

Process of recognition/identification:
Derivatives in fact are the securities that determine the respective prices from a fundamental asset and we can understand it through an example. If there is a stock option contract, it will be a derivative because it draws its price from the stock and on which the contract has standings. When we talk about other orders or commands then there are commodities futures. Commodities futures are the contracts that are formulated for the purpose of making deliveries of the commodities like wheat, gold etc. for future. Many other complicated financial instruments are also found like default exchange/swap on credit.

  • Institutional directives:

Cato.org claims that the financial trading for derivatives has to pass the three regulation stages. These regulations are governed by the clandestine monetary institutions, the CBOE and the brokerage firms which make trading happen. First of all, the private regulating institutions have to decide that what trading actions are permitted. Once it is decided then they conduct activities to make these trading possible by carefully following the rules that they have established. Private regulators exercise their power to make sure the worthiness of a derivative market and they perform this activity by examining the reliability of the involved institutions.

  • Exchange and Security Commission:

SEC that is known as security and exchange commission is a governmental institution of the USA. This works for making the financial markets reliable and ensure their integrity. It is also responsible for the derivative. SEC makes rules so that the element of corruption and fraud could be removed and the faith of the people in such markets could be retained. It also works to ensure that no manipulation or illegal activities are taking place in the market and everything is going very well.

  • U.S Futures and Commodities Trading commission:

This is a government organization which works similar to the SEC and its functions are almost similar to the SEC. It works to ensure and regulate the stock option derivatives but it also governs the future contracts of the commodities too. Future contracts are those that relate with the delivery of the commodities in the future like the delivery of wheat or gold. Futures and Commodities Trading Commission also regulates and governs the actions of commodity exchange including Chicago Mercantile Exchange and the CBOE. So, it clearly demonstrates who regulates the derivative trading.

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