Assessing the Impact of Derivatives on the 2008 Financial Crisis and the Effectiveness of Subsequent Regulatory Reforms

Abstract

The 2008 financial crisis was a global financial catastrophe that reflected the misuse of financial derivatives in financial markets, such as credit default swaps, asset-backed securities and collateralized debt obligations, exposing significant weaknesses in the global financial system. These financial instruments were designed to hedge against debt risk, but their lack of transparency and massive misuse ultimately led to the accumulation of systemic risk that accelerated the financial crisis. Since then, regulatory authorities around the world have realized the necessity for stronger regulatory frameworks, and a series of significant reforms have been implemented, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States, the European Market Infrastructure Regulation in the European Union, and the Basel III international regulatory framework, with the objectives of increasing transparency in financial markets and improving the risk management measures of financial institutions. This paper will explore the role of derivatives in the 2008 financial crisis and examine the effectiveness of these regulatory measures introduced after the crisis in enhancing stability of financial system.