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The Editors

Derivatives Are Still Too Dangerous

Global regulators must ensure that their solution doesn’t make things worse.

Not again.

Not again.

Photographer: Three Lions/Hulton Archive/Getty Images

Financial regulators have done a lot to reform the derivatives markets that helped turn the financial crisis of 2008 into a global disaster. But their work is unfinished — and there’s even a danger that, in one way, they might have made things worse.

Derivatives are bets on the performance of something else, such as stocks, interest rates or creditworthiness. They can be useful in mitigating risks and expanding investors’ choices: A bank, for example, might use an interest-rate derivative to protect itself against rising borrowing costs, or a hedge fund might use a credit derivative to bet against a company’s bonds. But because they enable big wagers with little money down, they can quickly generate losses and cash demands large enough to destabilize the entire financial system.