Derivatives Instability in the Post-Global Financial Crisis Era: Evidence from Transaction-Level Data through a Legal and Regulatory Lens

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Abstract:

Despite extensive regulatory reforms implemented in the aftermath of the Global Financial Crisis (GFC), derivatives markets have continued to experience episodes of instability, several of which have required public sector intervention. This paper examines these episodes through the combined lens of transaction-level market data and the evolving legal and regulatory framework governing derivatives markets.
First, we identify a structural problem of uncertain transparency and structural opacity. Although regulatory authorities possess the technical capacity to monitor market developments at near–real time frequency, effective oversight is frequently constrained by the limited reliability and consistency of data reported by market participants. These challenges are further compounded by the fact that a substantial share of critical derivatives-based benchmarks remains outside the direct supervisory purview of European Union authorities.
Second, we demonstrate that post-crisis regulatory reforms have generated new forms of legal privilege within derivatives markets. In particular, mechanisms such as margining, central clearing, and portfolio compression alter the distribution of risk and priority among market participants in ways that may amplify systemic vulnerabilities under conditions of market stress.
Third, we analyse the treatment of derivatives within the broader architecture of banking regulation, highlighting how recent innovations in financial engineering have further intensified these structural privileges and, in certain circumstances, contributed to renewed instability.
Finally, we outline a set of potential policy interventions aimed at mitigating these vulnerabilities and strengthening the resilience of derivatives markets.