The Impact of regulatory changes on derivates markets

This dissertation investigates the impact of regulatory changes on derivatives markets.The importance of theseissues is underscored by the increasing prevalence of derivative securities worldwide. As both the benefits and detriments that derivatives bring to capital markets can be significant, it is essential to understand the micro structure of derivatives markets. Each essay addresses a research question with scarce or conflicting prior research findings to provide empirical evidence which can assist policy-makers to develop a comprehensive understanding of the potential impact of regulations on derivatives markets.The first issue examined in this dissertation is the impact of short sales restrictions on futures pricing efficiency in China.In 2015, the regulator imposed new restrictions in China's equities market, which prohibited investors who borrow shares for short-selling from covering their positions within a trading day.This dissertation finds evidence that the short sales restrictions exert a significant effect on index futures mispricing. Futures under-pricing occurs more frequently across a range of transaction cost levels, while futures over-pricing occurs less frequently. In addition, results indicate that the relative size of futures mispricing is significantly greater at various transaction cost levels under the new short sales rule.The second issue examined in this thesis relates to the effects of message traffic regulatory restrictions on the relative pricing efficiency between index futures contracts and the Exchange-Traded Funds (ETFs) that track the index.This study is conducted based on regulatory changes in four jurisdictions, namely Australia, Canada, Italy, and France. Results reveal that the message traffic restrictions impose a significant impact on the return correlations between index futures and ETFs. However, the direction of the changes var y across markets. The return correlations in Australia and Canada increase after the transition, while in Italy they decrease under the new regulation. Further, the return correlation between the two instruments in France remains unchanged during the sample period. The third issue investigate d in this thesis is the impact of dark trading regulations on options market liquidity. This dissertation aims to bridge the gap between the literature of dark trading and options market liquidity. This research documents that the restrictive dark trading regulation imposes a mixed impact on the options market liquidity. For call options, the bid - ask spread and market depth increase after the transition. The effective spread also increases, which indicates t hat call options traders experience higher execution costs under the new rule s . Similarly, for put options, the bid - ask spread and market depth increase after the regulatory change. However, the effective spread for put options is less affect ed by the dark trading regulation s . Results also reveal that the realised spread and price impact do not show a substantial change during the sample period for both call and put options