OTC derivatives : filling the gaps in investor protection

  • Lee Foong Mee

    Student thesis: Doctoral Thesis


    The dramatic growth of over-the-counter (OTC) derivatives in the last two decades and the ever-expanding range of financial derivative have triggered concerns as regards investor protection. These concerns have been exacerbated in recent times by phenomenal losses sustained by several large corporations (including municipalities), in the United States, Europe and Asia.
    This thesis seeks to evaluate the capacity of the existing regulatory framework in Australia to provide protection to participants trading in the OTC derivatives markets. The evaluation is carried out in three parts: first, by identifying the gaps in the Corporations Law regimes, second by determining the extent to which the general criminal and consumer laws are capable of stepping into the breach left open by the Corporations Law and third, by locating the gaps in the supervisory structure by identify the participants who are not subject to any form of supervision by the regulators.
    The examination conducted in this thesis of the regimes in Chapters 7 and 8 of the Corporations Law reveals a number of gaps in respect of investor protection. Significantly, the OTC derivatives market, which is by far the larger market compared to the on-exchange derivatives market, is generally unregulated by the Corporations Law. Comparative analysis between the sanctions provisions in Chapters 7 and 8 of the Corporations Law and those in the Crimes Act 1900 (NSW) and the Trade Practices Act 1974 (Cth) indicated that whilst these latter Acts have the potential to act as a substitute for some of the sanctions provisions in the Corporation Law, about half of the sanctions provisions under the Corporations Law regime has no equivalent provisions in these Acts. In consequence, some regulatory gaps remain. Gaps also occur in the supervisory structure as the surveillance by regulators of market participants is focused along institutional lines.
    The failure of the law to provide adequate protection to investors trading in the OTC derivatives markets is due primarily to an outdated, inflexible and inappropriate regulatory framework which, when originally constructed, was not intended to regulated the broad spectrum of financial derivatives. This thesis discusses the gaps and deficiencies in the Corporations Law regime and also discusses the recent recommendations made by the Wallis Committee and the Companies and Securities Advisory Committee as well as the proposals of the Treasury in relation to investor protection. It also provides some suggestions for law reform.
    Date of Award1998
    Original languageEnglish

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