Money for Nothing — Or Dire Straits? Public Funds and the Derivatives Market
Charles D. Thompson II | 1997 U. Ill. L. Rev.
Since the heavily publicized bankruptcy of Orange County, California, derivative markets have been the subject of public and legislative debate. Much of the publicity has incorrectly painted derivative instruments as the cause of recent public investment fund losses. Some legislatures have responded by entirely prohibiting the investment of public funds in derivative markets. Derivatives are complex financial tools, but when properly understood and utilized, they can be a key component of a municipality's portfolio. This note proposes a regulatory framework that will allow investment in derivatives by those municipalities equipped to handle the sophisticated tools, while limiting such investment by those municipalities unable to adequately protect themselves.