The Wall Street Transparency and Accountability Act will lessen risks by restructuring how major banks trade derivatives and by requiring most derivative contracts to be cleared by a clearinghouse. The legislation may also have derivatives traded through exchanges.
Derivatives are used as a risk-management, or hedging, tool. The agreements are between two parties that relies on something occurring in the future, like the performance of an underlying asset including commodities, equities or bonds. Derivatives have become more complex and exotic over the years, and the risks only increased.
If “too big to fail” is done away with, could derivatives and other highly risky bets go the way of the dodo bird?
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Max Chen contributed to this article.