Growth in Financial Derivatives: The Public Policy and Accounting Incentives

• In Event: Research in Financial Accounting

Abstract

Abstract
During the period 1995 – 2012, the USA has captured a large proportion of both invention and growth in financial derivatives. The notional amount of total derivatives held by U.S. bank holding companies has grown from 16.6 trillion in 1995 to 308 trillion in 2012, while the U.S. GDP has slightly more than doubled from 7.7 trillion to 16.2 trillion over the same period. In this paper, we consider three potential drivers of this growth: (a) the Gramm-Leach-Bliley Act of 1999 that repealed the Glass-Steagall Act; (b) the Commodity Futures Modernization Act of 2000 that sanctioned gambling in securities by preempting all anti-bucket shop laws; and (c) the SFAS 133 Accounting for Derivative Instruments and Hedging Activities which was issued in 1998 and became effective in 2000. The results are consistent with two expectations: (i) the enactment of the two Congressional Acts was a motivating factor in the growth of trading derivatives (which amounted to 98% of the total derivatives), and (ii) adoption of hedge accounting as a contributor to growth in non-trading derivatives.

Authors

• A. Rashad Abdel-khalik, University of Illinois-Urbana-Champaign

• Po-Chang Chen, Miami University