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Derivatives market the scapegoat: Scholes

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U.S. banks and other financial institutions are adapting to new rules for the derivatives market that were put in place as part of the Dodd Frank act. The legislation, which was passed by Congress in 2010, is supposed to help prevent another financial crisis, which nearly brought the global economy to its knees in 2008 and 2009.

But, one of the world's top derivatives experts says the new regulations are misguided.

"Derivatives had very little if anything to do with the financial crisis," Myron Scholes, the nobel-prize winning professor at Stanford University and co-founder of hedge fund Long-Term Capital Management, tells BNN. "From the Dodd-Frank bill and other actions that have been taken it has become a whipping boy or a scapegoat for things that have happened."

Scholes rose to fame as the co-creator of the Black-Scholes model, which is used to price certain derivatives such as options. Scholes' hedge fund Long-Term Capital Management used the model extensively before collapsing in the wake of the Asian financial crisis in 1997 -- though the model is still widely used in financial markets.

Scholes says recent financial regulations will have unintended consequences.

"We'll regulate, which will increase the cost and reduce the value of society of things that were valuable before and those things that were valuable…will be handled outside of the institutions being regulated," he says.

"We're going to more and more regulation of the institutions, but we're not really understanding the functions of finance. Functions of finance determine what flows go, what things are needed and institutions are the ways in which the functions are handled."

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