Regulatory Tools – Key to Market Efficiency

Regulatory Tools – Key to Market Efficiency

V. Shunmugam, Niteen Jain and Nazir Ahmed Moulvi

(Published in book titled ―Research in Financial Derivatives‖ by Pondicherry University, India)

Mankind‟s quest for markets that can meet the challenge of an unpredictable future with limited resources ended up in derivative markets, which provides all the stakeholders equal access to spread their risks thinly into the economy. Until the negative impact of the financial crisis on them was experienced, the boom in the business of exchange-traded marketplaces blinded both regulators and stakeholders in developed economies from possible pressure points that these markets could come under, leading to undesirable impact on the real economy. Post-crisis, regulatory tools of derivative markets have found a renewed attention. Though they are critical to maintaining market discipline and its healthy development, the tools can also be a big hindrance to the normal functioning of markets if not used judiciously. Therefore, a judicious use of an optimal mix of various regulatory tools would not only help these markets to efficiently function but also help effectively serve their stakeholders. Also, real-time, one-point coordination among all regulators at the international level – rather than regulation in isolation across scattered geographies – maybe the panacea to keep healthy the world of interconnected financial markets. With the progress of civilisation, as humans began specialising in what they produced, markets emerged to transact goods and services among specialising communities (usually located in geographically diverse regions) using a common medium called ‗money‘ – a currency note backed by credible public institutions such as treasuries of kingdoms or by governments that have a long history of autonomous existence from mankind‘s journey from the autocracy that prevailed few centuries ago to the democracy of modern days 1. In the process, much had been left to the...