Abstract
The warning words of Warren Buffet, when reflected upon in the aftermath of the global financial crisis, do not present derivatives in a favourable light. However, it is crucial to analyse the reasoning behind Buffet's scepticism towards the growing market for derivatives. His concerns for the economy are pre-dominantly based on its uncontrolled exposure to inherent risks associated with derivatives. Such fears are legitimate because inadequate regulation of derivatives could easily lead to another black-swan event, where an unabsorbed collapse of a big player will send systemic shockwaves throughout the financial system. However, such fears should be harnessed to improve the regulation of derivatives and not condemn them altogether. Regulatory reforms prescribed under the Dodd-Frank Act, European Market Infrastructure Regulation (EMIR) and Basel III could be promising steps towards preventing derivatives from becoming a threat to financial stability.
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