Since 1990, corporations, financial institutions investment managers such as hedge funds and even governmental entities have been relying upon derivatives to manage financial risks. Hedge funds in particular use derivatives to increase investment yields by leveraging their capital and hedge against fluctuations in interest rate risk, foreign exchange risk and economic events.
Regulations has tended to lag behind development in capital markets. However, the Basel Committee on Banking Supervision (the "Basel Committee") and the International Organization of Securities Commissions ("IOSCO") have developed proposals that can serve as guidelines for supervisory authorities in their drive to enforce controls in their domestic markets. These include:
Proposals to improve regulatory disclosure and reporting and proposals to improve supervisory oversight of "highly leveraged institutions" active in the derivatives market.
Proposals to improve market practices and conventions
Proposals to develop "best practices" the Counter party Risk Management Policy Group ("CRMPG") and the Foreign Exchange Committee of the Federal Reserve Bank of New York.