Chen, Chao-hung; (2008) Trading risk: The contractual nature of derivative transactions and certain regulatory issues. Doctoral thesis , University of London.

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Abstract

In this thesis, we explore the contractual nature of so-called "derivatives" and how they might be incorporated into existing legal concepts. This thesis takes the position that derivatives are in essence contracts to trade risk, and argues that commodity future delivery contracts fall within the legal meaning of "futures" if they are traded as notional transactions settled by cash. We also argue that derivative instruments and traditional gambling instruments are both aleatory in nature. The question then is: "How should we allocate the function between gambling and financial laws in order to control speculation?" Moreover, this thesis argues that derivative instruments in general are not traditional insurance policies. We find no convincing reason to see derivative instruments as another contract uberrimae fidei and to restrict the use of derivative instruments with an equivalent of the insurable interest test. However, whether a firm selling derivative instruments should be regulated (and furthermore, be regulated like insurance companies) may require further consideration. In addition, securities laws are constructed upon the special characteristic of "securities", which is not shared by most derivatives. Caution is required when applying rules developed in securities regulation to derivative instruments. However, we also recognise the potential for problems with insider dealing and market abuse in the derivatives market such that regulators might have to intervene. In the end, although derivatives do not fit well in existing categories, this does not mean that we need a special set of derivative contract laws: derivative instruments are based on general contract law, and without more substance, any derivative contract law is meaningless.

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