Applying the Pharmaceutical Approval Model to Over-the-Counter Derivatives

Journal of Theoretical Accounting Research, Vol. 6, No. 1, pp. 72-88, Fall 2010

Posted: 26 Oct 2011 Last revised: 2 Jan 2013

See all articles by Hassan R. Hassabelnaby

Hassan R. Hassabelnaby

Northern Kentucky University

Duane Gustrowsky

affiliation not provided to SSRN

Kathryn J. Chang

Sonoma State University

Date Written: October 20, 2009

Abstract

The recent global financial turmoil and economic recession have exposed the serious shortcomings of the current U.S. regulations for over-the-counter (OTC) derivatives. Drawing upon the arbitrage economic theory and the spirit of the U.S. Food and Drug Administration model, we propose a model assuming that the market will not behave rationally and efficiently when investors or consumers do not completely understand the risks associated with the financial products they hold. Therefore, it is essential for the Securities and Exchange Commission (SEC), as a designated regulator, to demand a full disclosure from issuers of new OTC derivative innovations and to evaluate and approve them before they are released to the market. This suggested model will not only enable efficient risk allocation in the market but also take a proactive approach in addressing the problem of unregulated OTC derivatives. The suggested model, if successfully implemented, will significantly improve the efficiency and stability of the U.S. financial markets both now and in the future. This commentary should be of interest to investors, regulators, financial institutions, and academicians.

Keywords: over-the-counter derivatives, U.S. Food and Drug Administration model

JEL Classification: G18

Suggested Citation

Hassabelnaby, Hassan R. and Gustrowsky, Duane and Chang, Kathryn J., Applying the Pharmaceutical Approval Model to Over-the-Counter Derivatives (October 20, 2009). Journal of Theoretical Accounting Research, Vol. 6, No. 1, pp. 72-88, Fall 2010, Available at SSRN: https://ssrn.com/abstract=1949769

Hassan R. Hassabelnaby (Contact Author)

Northern Kentucky University ( email )

Nunn Drive// BC 305D
Highland Heights, KY 41099
United States
859-572-7720 (Phone)

HOME PAGE: http://https://www.nku.edu/academics/cob.html?

Duane Gustrowsky

affiliation not provided to SSRN ( email )

Kathryn J. Chang

Sonoma State University ( email )

1801 East Cotati Avenue
Rohnert Park, CA 94928
United States
7076642400 (Phone)

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