Evaluation: Medium length paper and in-class presentations and participation.
Writing credit: Minor credit is available at student's option. Major credit is generally discouraged.
Prerequisites: None (and no prior familiarity with derivatives is necessary.) However, some familiarity with U.S. and/or non-U.S. securities and investment laws will be useful. Also, students taking (or who have taken) Taxation of Financial Instruments may find this seminar particularly valuable.
Description: Derivatives (e.g., over-the-counter and exchange traded futures, forwards, options and swaps) are central to modern global finance. They are accused of contributing to the recent financial crises; and in 2010 the Dodd-Frank Act rewrote the law and regulation of OTC derivatives in order to address regulatory defects that the crises revealed. This seminar will introduce students to the different types of derivatives markets and U.S. regulation of these markets. Specifically it will explore the different market structures for derivatives that are permissible under U.S. law, including, formal, organized exchanges (e.g., the CME), the over-the-counter markets; the types of instruments that may be traded on each; the types of participants that can use each; and the different levels of regulatory supervision applicable to each. The course will also consider the legal elements and negotiable variables of OTC derivatives, including the common ISDA master agreement, schedule and credit support annex. We will also consider the role played by derivatives such as credit default swaps in structured finance; and we will review the role played by intermediaries and liquidity providers (such as investment banks and hedge funds). Lastly, we will consider the policy and systemic implications raised by derivatives and their users, including questions suggested by the collapses of Bear Stearns, Lehman Brothers, AIG and other fiascos. Students are expected to be active participants in the class, including taking responsibility for in-class presentations (e.g., Powerpoint slides.) A class trip to the floor of the New York Mercantile Exchange (NYMEX) may also be included.