Derivative Instruments: Lessons For the Regulatory State

Abstract

Many people claim that the financial innovations that have taken place over the past twenty-five years are even more impressive. Perhaps they are right. In particular, collateralized mortgage obligations (CMOs), zero coupon bonds, high yield (junk) bonds, exchangeable bonds, Nikkei put warrants, adjustable rate and auction rate preferred stocks, SuperShares, natural gas derivatives, credit card receivables, PIK bonds, index futures, municipal bond futures, and Eurodollar futures are all new securities instruments. Additionally, swaps and trading strategies such as portfolio insurance have come onto the scene to change the way that trading is done in fundamental ways. However, complex derivative instruments, including options, forward contracts, and futures, have played important roles in investment, risk-reduction, and speculation since the Seventeenth century. And, as Robert Merton has observed, even money itself, in its original incarnation, was a derivative instrument4 because the value of money originally was " 'derived' ... from its convertibility into the underlying gold held in depositories." Thus, not only is financial innovation a time-honored tradition, so too are derivatives, the financial instruments that are the subject of this symposium issue of the Journal of Corporation Law.