Regulating Financial Derivatives? Risks, Contested Values, and Uncertain Futures
| DOI | 10.1177/0964663911413795 |
| Date | 01 December 2011 |
| Published date | 01 December 2011 |
| Subject Matter | Articles |
Article
Social & Legal Studies
20(4) 441–462
Regulating Financial
ª The Author(s) 2011
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DOI: 10.1177/0964663911413795
Contested Values, and
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Uncertain Futures
Donatella Alessandrini
University of Kent, UK
Abstract
This article engages with debates concerning the regulation of financial derivatives and, in
particular, with the assumption according to which their speculative ‘excesses’ can be
effectively curbed so to restore an otherwise healthy system of production, usually the
industrial/manufacturing one, endowed with a ‘real’ value separate from that produced
by financial markets. Arguing that derivatives complicate such an assumption, the article
asks the question of how to act when the ‘value’ they refer to becomes contested. In
this respect it explores the potential of the Ecuadorian Proposal for a New Regional
Financial Architecture to act in the face of the contestability of value of exchange rates
and, in so doing, to represent an alternative to the real/financial economy split and the
regulatory debate as carried out so far.
Keywords
crisis, derivatives, Ecuador, finance, real economy, uncertainty, value
Introduction
Since capital controls have been lifted and exchange rates have been made to fluctuate in
the market, financial derivatives have become a crucial tool to manage the risks of global
investing. They provide firms and governments with the means to hedge (i.e. protect)
themselves against the risks of price fluctuations, for instance, those deriving from float-
ing exchange, and interest, rates. However, as derivatives are instruments whose value
Corresponding author:
Donatella Alessandrini, Kent Law School, University of Kent, Canterbury CT2 7NS, UK
Email: d.alessandrini@kent.ac.uk
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Social & Legal Studies 20(4)
relates to that of the underlying asset, they have also given rise to speculation, and this
aspect has gained prominence in the context of the global financial crisis of 2008. The
emerging consensus among international policymakers is that their regulation is neces-
sary so to curb their speculative excesses while preserving their hedging purpose.
This article engages with the debate concerning the regulation of financial derivatives
and in particular with the assumption that there is a distinction to be made between a
so-called real, productive sphere of the economy that needs to be re-appropriated and
stimulated, and a purely speculative, unproductive one that needs to be tamed, with
financial derivatives belonging to the latter. This kind of framing characterizes not
only financial commentaries (Jenkins, 2008; Ishikawa, 2009) and current reform propos-
als (US and EU in particular) but also the position in the social sciences which, even as it
recognizes that speculation is inherent in capitalism, sees derivatives as violent financial
innovations whose threat needs to be, and can be, eradicated, usually through more strin-
gent regulation (LiPuma and Lee, 2004; Dodd, 2005).
I do not doubt the violence of derivatives and more generally that of financial capit-
alism: indeed important work has already been done in this respect (McNally, 2009;
Harvey, 2010; Marazzi, 2010). However, the question I ask is whether this position
misses something important in considering financial derivatives as an excess that can
be easily done away with. And the reason why I think it does is that it underestimates
two aspects of derivatives trading: first, the extreme difficulty, if not impossibility, of
neatly distinguishing between the hedging and the speculation they allow. Second,
and importantly, the fact that contrary to what derivatives claim to be doing, they
do not merely derive their value from that of the underlying asset but also participate
in the making of that value. Taken together, these two aspects challenge the
assumption according to which the speculative ‘excesses’ of financial derivatives can
be easily curbed in order to restore an otherwise healthy system of production, usually
the industrial/manufacturing one, endowed with a ‘real’ value separate from that pro-
duced by financial markets.
The first two sections of the article therefore aim to complicate the real/financial
economy distinction underlying the regulatory response to derivatives and consequently
to pose the question of how to act when these boundaries become blurred. What is at
stake in recognizing this blurring is not only the challenge to the regulatory response
to the crisis but also the problematization of the ‘return to the real economy’ argument
in so far as it presupposes the possibility of disentangling financial from real values: the
significance of derivatives is that they show the complexity of such a task by bringing to
the fore the ‘contestability of value’, both financial and real value. Thus, the question of
how to deal with the financial uncertainty and the contestability of value revealed by
derivatives becomes crucial, particularly at a time when what constitutes a ‘worthy’
investment in the economy is becoming increasingly contested.
As a way to start addressing this question, the third section interrogates the ‘values’ that
have accompanied the exponential growth of financial derivatives and which have led to
the increasing ‘precarization’ of life, particularly the belief in the calculation and privati-
zation of risks. It suggests that it is on the basis of the undesirability of the social vision
predicated on these destructive values that a response to the uncertainty revealed by deri-
vatives should be articulated, rather than on the attempt to restore any ‘fundamental’
Alessandrini
443
value. Taking the example of exchange rates, the final section explores the potential of the
Ecuadorian proposal for a New Regional Financial Architecture to act in the face of the
contestability of value and, in so doing, to represent an alternative to the real/financial
economy split and the regulatory debate as carried out so far. What is interesting about the
proposal is its attempt to take financial uncertainty seriously by recognizing, while parti-
cipating in, the co-production of the financial and real spheres of the economy. First, by
proposing to deal with exchange rates in a cooperative manner, the proposal removes a
critical source of uncertainty from the realm of private dealings. Thus, it reduces the need
for firms and governments to hedge their operations against the risks of price volatility.
Second, by acknowledging, while trying to shape, expectations, it immerses fully in the
construction of exchange rates, rather than attempting to retrieve their ‘fundamental’ val-
ues. At the same time, the proposal recognizes that this kind of intervention needs to run
parallel to important changes in the ‘productive matrix’ of the region: it is in this context
that the ‘real’ in the economy is ‘invested’ with a different meaning.
I Interrogating Derivatives
Derivatives have reached centre stage in the course of the current crisis. Despite the dif-
ferent interpretations of the crisis’ underlying factors (Bellamy Foster and Magdoff,
2009; Gowan, 2009; McNally, 2009), it is accepted that the unregulated proliferation
of financial derivatives has been one of its most important triggers, particularly since
the ‘miscalculation’ of their risks has emerged fully in 2008, sending shock waves to the
international financial system first and the global economy later. The fact that the
notional amount outstanding for over-the-counter derivatives (not traded on formal
exchanges) is estimated by the Bank for International Settlements at US$615 trillion
(BIS, 2010) leads one to wonder exactly what kind of financial instruments derivatives
are, what kind of value they express and what type of relationship they have with the so-
called real economy.
Addressing these questions is, however, not an easy task. The standard definition of
derivatives in finance textbooks is that of contracts whose value is derived from the value
of an underlying asset, an asset being a commodity or a financial asset, such as interest
rates and exchange rates. However, to talk about derivatives in an undifferentiated
manner is problematic since they refer to different things as well as different values. For
instance, futures and options, which are the simplest forms of derivatives, are different
contracts. Generally speaking, futures are contracts where two parties commit to buy or
sell a certain asset at a future date and at an agreed price, whereas options are contracts
which confer the right to buy or sell a particular asset at a certain date and at a certain
price. Not only are they different things, they also refer to different values. With futures
we are talking about the value the asset is supposed to have at a future date whereas
with options at issue is the value of the right to buy or sell the underlying asset at a certain
price. It is sufficient to think about the various types of derivatives that are today in
circulation – forward, swaps, Credit Default Swaps, Collateralized Debt Obligations, etc.
– to appreciate that any comprehensive definition is unsatisfactory.
Thus, one way of approaching the question of what they are is by looking at what they
do. Historically their realm has been that of commodities, in particular agricultural
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commodities, and they have been important in ensuring continuity in the production
cycle by allowing farmers, for instance, to hedge their operations against the risks...
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