One effect of the financial crisis of 2007-2009 was to jump-start afocus on macroprudential supervision, a supervisory approach whichadopts a bird’s-eye view in assessing and addressing systemic threats tofinancial stability. In addition to the threats to the financial systemposed by the financial reach and exposure of large systemically relevantcorporations, threats can also come from broader financial activity suchas the design and distribution of innovative financial products withinfinancial markets. Thus, product intervention powers may be useful inthe future to financial supervisors attempting to address systemic riskderiving from financial innovation and growth. The utility of productintervention can be demonstrated by using the catastrophe bond marketsas a case study.Extreme climate-related events are increasing in magnitude and frequency as a result of climate change and consequent losses are likewiseincreasing. The need to transfer these risks is leading to a growth indemand for insurance and the demand is beginning to exceed the capacity of traditional insurance and reinsurance. This has led to a type ofbeneficial financial innovation—the creation of instruments whichtransfer these catastrophe risks to the capital markets. The prevalence ofcatastrophe bonds in the financial markets is therefore growing, with thenumber of issues increasing steadily year-on-year. On the back of this, anumber of catastrophe-linked derivatives are beginning to be traded inthe markets. This Article argues that a number of features of the designand distribution of these financial instruments may render them systemically relevant in the future. This is so particularly in view of the potential for significant common exposures to develop, which, should widespread and significant losses occur, may engender panic in thefinancial markets. It also argues that the right way to address thesesystemic risks may be through the exercise of product intervention powersrather than by other regulatory means. Accordingly, this Article assessesthe extent to which such powers, derived from the laws of the UnitedKingdom and the European Union, can be exercised for the achievementof macroprudential goals. More broadly, it analyzes what lessons can belearned from this case study about product intervention as amacroprudential tool to prevent or mitigate the build-up of systemic riskto financial stability
