Hedge Funds and Credit Derivatives Regulatory Reforms and Suggestions – How the International Financial Environment will be Affected

Abstract

This paper aims to research whether the use of complex financial products by Hedge Funds, and the Over-the-Counter (OTC) derivatives by Banks, should be additionally regulated. The research work is focused on the existed regulation of Hedge Funds and of credit derivatives and whether a proposed set of regulation reforms could aim in the manipulation of future crisis in the finance environment. The research effort was based on the study of Hedge Funds as a source of investment opportunities for capital markets and economy and of Banks, as described in the literature, as well as the international developments in the regulation of CDS (Credit Default Swaps). The risks faced by investors and banks, studied and analyzed in parallel with the recent efforts to regulate OTC derivatives in European level. The findings and proposals concluded that the impending regulation of the EU, should differentiate the Hedge Funds and redefine their systemic relevance. The findings for the standardized (and non-standardized) OTC derivatives concluded the necessity of the establishment of Central Counterparties, Regulated Reporting Platforms and of a single supervisory authority, responsible for monitoring the regulation and activities of Hedge Funds and the use of CDS by Banks.