Information Disclosure, Risk Trading and the Nature of Derivative Instruments : From Common Law Perspective

This paper explores issues of pre-contractual disclosure for derivative instruments, of which this paper describes as contracts to trade risks, in the UK and US. While there is no general duty of disclosure in common law, this paper focuses on whether there should be a duty of disclosure for derivative instruments by comparing with securities law and insurance law. This paper argues that mandatory disclosure in the securities market cannot be extended to exchange-traded futures contracts (save where securities are involved) because of the nature of securities. In addition, this paper argues that derivative instruments, though similar to insurance in certain regards, lack the inequality of knowledge issue underlying contracts of insurance; and thus, derivative instruments should not be seen as another type of contract uberrimae fidei. However, while we cannot establish a duty of disclosure by treating derivative instruments like securities or insurance, we argue that the concepts of market abuse and insider dealing might provide a better basis for addressing information issues in the risk trading market