Derivatives are invented securities such as futures contracts, collateralized debt obligations, and credit-default swaps that are related to real assets or events but have no inherent value of their own.
They have legitimate uses, such as allowing airlines to hedge against wild swings in energy prices, so they can better control costs.
But derivatives are also unregulated, which allows speculators to place huge bets on various parts of the economy in secret, which can amplify real problems and occasionally produce disastrous results.
Congressional reform proposals call for regulating derivatives on exchanges, the way stocks and commodities are regulated. Hedge funds and financial firms oppose this, because it would shine light on one of the shadiest parts of the financial system and cut into profits for the most privileged firms. But it’s hard to argue against transparency, which is why some regulation of derivatives looks likely.
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