Derivatives: evolution of regulation

One of the main difficulties in regulation of financial market by state over the course of its entire history is the legal demarcation of transactions with derivative financial instruments from betting and gambling. This delimitation directly impacts on model of regulation, as well as on the possibility of providing people conducting operations on over-the-counter financial market and Forex market with a protection.

All the time legislation of developed countries was rather critical towards gambling. In the eye of Roman private law, transactions aimed at gambling were the subject of criminal law, whereas parties of betting were denied judicial protection.

In 1734 in Great Britain futures and options market already existed but despite that fact all transactions were prohibited. In the end of XIX century in Germany and France a special status of financial instruments was defined. From that moment, protection could be applied to transactions with derivatives.

In the USA up to 1974 all derivatives were equated to gambling and were prohibited. An exception was only made for deliverable derivatives with agriculture production as their base asset and it was added following to adoption of the Commodity Exchange Act of 1936 year.

Further in addition to the law the list of derivative financial instruments was extended. From that moment, it included transactions implying payment of money funds according to change of price for goods, services, interest rates and other types of base asset.

Regulation of the emerged derivatives market by the same law was passed from the U.S. Department of Agriculture to an independent regulating agency   – Commodity Futures Trading Commission. Evolution of legislation enabling demarcation of transactions with derivatives from betting transactions demonstrates difficulties in legal delimitation of such transactions. One can say that gambling in fact have much in common with derivatives that sometimes allows manipulating with those terms. Similarity of two types of transactions is proven by the fact that majority of Great Britain FOREX companies offer their clients transactions of two types: Spread Betting and operations with CFD. For work with both groups of instruments the same trading platforms and technical means are used, in fact clients performs similar actions, however, in case with betting they are qualified as a gambling transaction, whereas in the second case they are interpreted as conclusion of an agreement - transaction with derivative financial instrument.

At present in all Western countries with developed financial market only individuals and properly licensed organizations are empowered to conduct transactions with derivatives. Such operations are strictly supervised and regulated by relevant authorities.