The G20 Over-the-Counter Derivative Markets Reforms: More Harm than Good? A Theoretical Perspective

The Great Financial Crisis (GFC) has revealed that financial theory influences the manner in which financial markets are conceptualised and consequently regulated as evidenced by the deregulation that took place in over-the-counter derivative markets (OTC-DMs) pre-GFC – attributable to the economic ideology proselytised by theories of modern finance. Operating on the premise that theory matters for how we regulate, this thesis explores post-GFC reforms in OTC-DMs. Specifically, this thesis explores the central counterparty prescription, the reporting obligation, and the centralised trading requirement to determine whether there is any congruence between regulatory reforms in OTC-DMs and theories of modern finance. In addition, this thesis assesses these reforms utilising alternative theories of finance, which it argues are better suited for the operation and regulation of real-world financial markets namely behavioural finance, Minsky’s financial instability hypothesis, and imperfect knowledge economics as an evaluative framework. This analysis reveals that the endogenous risk attributable to fundamental uncertainty, irrationality, and the imperfect knowledge constraint is not fully accounted for in current regulatory reforms. Consequently, this thesis argues that regulatory reforms in OTC-DMs may prove ineffective in environments of financial stress. Finally, this thesis makes the case for an approach towards financial regulation that recognises the primacy of endogenous risk in financial markets.