New spotlight on derivatives

MPs are to begin an investigation of the potential dangers of the spiralling derivatives market in the next few weeks, as latest figures show that turnover in exchange-traded derivatives grew by 45 per cent worldwide in 1994.

The Treasury and Civil Service Committee has called on interested parties to give their views on possible systemic risk from derivatives and any need for new regulation. The Bank for International Settlements (BIS) in Basle made clear in its latest report on international banking and financial market developments that use of derivatives is booming while fears of losses from derivatives has also taken off. It pointed to the US local authority Orange County which has filed for bankruptcy due to a highly leveraged derivatives strategy which went wrong.

The BIS report said this showed that "the market value of complex securities involving derivatives can be very difficult to evaluate for investors who lack the necessary expertise, and that many end-users' internal control mechanisms remain inadequate." The BIS report also stressed the "inadequacy of risk management policies among derivatives end-users."