The Rise of Derivative Market:

In the 1980s, the process of liberalization and deregulation of the financial markets gained momentum when the British and American leadership led what could perhaps be considered as the worldwide deregulatory movement. While the liberalization drive under the Reagan administration in the USA brought about major changes, London's pre-eminent position in the world's financial arena was further elevated by the "Big-Bang" of 1986, which allowed increased presence of foreign firms. This resulted in what is known as integration and the securitization of the world financial markets. The arrival of Information Technology (IT) facilitated the process of integration on an unprecedented scale. Cross-border activities in finance flourished and the access to different markets in the world increased manifold while transfer of resources from one market to another became rapid and almost cost free.

It was also at this juncture that trends in disintermediation manifested manifold compelling banks to create new products and services. The prescription of capital adequacy norms by the Bank for International Settlement (BIS) resulted in increased costs of loans to banks and as an off-shoot of this development, banks found securitization, an off-balance sheet activity, an attractive route to expand assets. With the integration of the financial markets and free mobility of capital, risks also multiplied and risk diversification came to occupy the center stage. This logically led to the evolution of risk hedging mechanisms, first in the forex markets and later in the other segments of financial service industry; and these have come to be known generally as ‘Derivatives'.

After emerging in the USA, the derivatives business expanded rapidly and flourished in the European markets. According to a recent estimate, the total value of derivatives issued world wide in April 2007 was over $300 trillion.