Regulate OTC Derivatives by Deregulating Them

As a result of the current financial crisis, there have been multiple calls for strict new regulation of over-the-counter (OTC) financial derivatives. In a new article entitled Regulate OTC Derivatives by Deregulating Them [free download], I propose instead that we consider returning to the common law approach to “off-exchange” derivatives—“deregulate” them by refusing to allow traders who use OTC derivatives contracts only to speculate, and not to fulfill a bona fide hedging purpose, to enforce their contracts in the courts. After all, there is no cheaper form of government intervention than refusing to intervene at all, even to enforce a deal.

From The Harvard Law School Forum on Corporate Governance and Financial Regulation blog post, "Regulate OTC Derivatives by Deregulating Them" by Lynn A. Stout, UCLA School of Law, October 20, 2009.

The complete paper, with the same title as the blog post, is available free here.