Systemic Risk and Intermarket Regulations In US Securities and Derivative Markets
Financial innovations in the banking sector, such as securitization, have been accompanied by innovation in the securities markets and include stock options strategies and the phenomena of stock index futures. These securities market innovations, that usually involve simultaneous trading in principal and derivative markets, provide the focal points of this chapter.
Since the market break of 1987, efforts have been made to improve clearing and payment systems, to prohibit brokers from "front running" clients' orders and engaging in other forms of market manipulation, to provide for intermarket cross-margining arrangements that potentially reduce gridlock and to institute circuit breakers. At the same time, little has been done to change the basic regulatory apparatus or to consider the relationship of financial market structure to the underlying economy.
Part I discusses the idea of a single regulator for securities and derivative markets. Part II considers clearance and settlement systems, differentiating securities and index future clearing and discusses foreign exchange issues. Part III considers the impact of futures exchanges on market volatility; and Part IV examines net capital rules for stocks and futures. Part V discusses the use of circuit breakers; and Part VI considers the broader issue of futures trading practices and investment horizons. Part VII concludes that subtle long-term issues have not been addressed in spite of the technical proficiency employed in dealing with clearance, payment and settlement issues.
After the 1987 market break, a presidential task force (the Brady Commission) was charged with investigating the break. The Brady Commission concluded that the prospect of clearing house failures reduced the willing-