The first part of the Note provides an overview of the nature of derivative financial instruments, both describing the types of such instruments currently in use and those who purchase such financial instruments. This introduction provides both an overv iew of the derivatives markets and an explanation for the public perception that derivatives are somehow inherently dangerous. The author explains that derivatives do bear some inherent risk, but if used correctly by knowledgeable parties, they can be us ed as either an investment device or more likely as a hedge by which to protect other positions taken by investors.

It was this climate of wariness about derivatives that prompted congress to act. However the author argues that the 1992 Act may have a potentially dangerous effect on derivative trading paractices in the United States, because strong regulation of thes e instruments will lead investors to foreign markets where regulation is less stringent if it even exists. The 1992 Act provides the Commodities Futures Trading Commission ("CFTC") with the discretion to exempt derivatives from CEA regulation. The autho r concludes that the power granted by the 1992 Act is vital to the continued competitiveness of U.S. futures markets, but will be meaningless if the CFTC does not exercise that discretion by granting broad exemptions.