IN SEPTEMBER 2008 Lehman Brothers went bust in what remains America’s largest-ever corporate bankruptcy. AIG, an insurer, would have done the same had it not been bailed out. Derivatives—contracts that take their value from the performance of an underlying asset—were not the main cause of Lehman’s problems, but by facilitating an explosion in leverage, they played their part in its demise. Derivatives were more directly culpable in AIG’s case, exposing the insurer to a series of unaffordable margin calls as its bets on credit-default swaps soured.

Fear of these opaque and often complex contracts prompted world leaders at the 2009 G20 summit in Pittsburgh to promise reform. All standard derivatives contracts were to be traded on exchanges or electronic platforms and cleared through central clearing-houses. Deals were to be reported to trade repositories. The margins set aside to guard against shifts in the values of derivatives were to be robust. The goal was to limit the risk of individual counterparty default, improve transparency and prices, and give regulators statistical tools to monitor risk.

Five years on from Lehman’s demise and four years after Pittsburgh, derivatives markets seem on the surface to have changed rather little. They are still vast. The notional value of contracts outstanding at the end of 2012 was $687 trillion, slightly up on 2007’s $670 trillion (if a bit lower than in 2011), according to the Bank for International Settlements.

The percentage of derivatives bought and sold away from recognised exchanges (in over-the-counter, or OTC, transactions), seems if anything to be increasing, from around 89% in 2007 to 93% in 2012. And their capacity to cause trouble seems undimmed. A JPMorgan Chase employee nicknamed “the London whale” lost $6 billion on derivatives in 2012; on August 14th two of his colleagues were charged with fraud by American authorities.


But dig down and things look different. More derivatives are being cleared centrally (see chart). once figures are adjusted for the double-counting that this implies (both sides of a trade are reported in clearing), the value of outstanding derivatives fell to $459 trillion in 2012 from $532 trillion in 2007, according to the International Swaps and Derivatives Association. More vigorous “portfolio compression” (a way of weeding out unnecessary contracts) is also reducing risk, as are higher margins.

More changes will come as implementation of two vast texts, the Dodd-Frank act in America and the EU’s European Market Infrastructure Regulation, grinds forward. Most American rules are in place; most European ones will be by mid-2014.

After several squabbles regulators in both places are now trying to present a common front. In July the Commodities Futures Trading Commission said that American banks and financial firms could comply with European norms instead of its own in a number of areas; both sides promised to keep working on comparable standards. But there are differences in approach—to margin and capital requirements, and to data privacy, for example—that may not be easy to iron out.

Reforms also bring risks of their own. As derivatives become more popular in other parts of the world, activity may seep to more lightly regulated jurisdictions elsewhere. Pushing more trades onto central clearing-houses may also concentrate counterparty risk rather than remove it.

The best clearing-houses set margin and other requirements, such as contributions to the funds that spread losses in excess of a defaulting firm’s collateral around other members, well above those required by regulators. They market themselves as safe rather than cheap. To remain so, they must limit themselves to the sorts of derivatives that are liquid and easy to sell, such as interest-rate swaps. Some regulators say they expect around 80% of derivatives to end up being cleared. That may be too ambitious for the financial system’s good.