Archive | August 2014

Economic Threats of Over the Counter Derivatives

Every transaction comes with a risk reduction plan and ignoring red flags when making a deal will usually result in losses and devaluation of assets. Ever since the financial market industry is growing exponentially, new and more risky methods of making deals and trading assets have emerged and are becoming more popular. One of the most successful is over the counter derivatives. Besides being fast and not requiring a clearing house, businessman chose it because they can get the full value of the trade as well the big possibility of gaining more than the value of the traded assets. If they get the best deal, it means that the other party received less of the actual value of the traded commodity. Fewer regulations are also being followed by over the counter derivatives and most transactions are private. These could result to fraudulent transactions causing many businesses to go bankrupt while others surge high by taking advantage of the weaknesses of others.

Since over the counter derivatives lacks transparency, it deprives the rest of the market of the details of the trade. This is critical since the entire market does not know why there is a sudden rise and fall of values of underlying assets. If the chain of reactions goes big, it can affect the stability of the economy. This causes many investors to theorize that over the counter derivatives has been one of the leading causes of the great depression in 2007 which lasted for almost three years and is still a threatening thought until today considering that the economy is still fragile.

There have been several solutions being formulated by the government to lessen the impact of threats from over the counter derivatives to the economy and protect the interest of investors. One of these is the Dodd Frank Act which was officially been implemented as part of the Federal Law of the United States last July 21, 2010. It aims to protect the stability of the economy by improving transparency and accountability of trades and other financial systems. It aims to protect a regular American taxpayer from the abusive financial services of the private sector as well as raise the confidence of investors by securing there investments through new regulations and a more centralized market. Despite the improvements in the financial systems, the act is still not fully functional. Over the counter derivatives are also still very popular despite new and stricter regulations.

 

This entry was posted on 16. August 2014, in Accounting.