Conventional financial theory has played an important – and yet largely unexamined – role in shaping how we regulate modern financial markets. This thesis explores the influence of conventional financial theory on the regulation of over-the-counter (OTC) derivatives markets in the U.S. and U.K. prior to the global financial crisis. More specifically, it explores how conventional financial theory failed to adequately account for both the complexity of OTC derivatives markets and the nature and pace of financial innovation and, ultimately, how these blind spots became reflected in a ‘non-interventionist’ approach toward their regulation now widely viewed as suboptimal. This thesis yields three important contributions to the scholarly and public policy debates surrounding the regulation of modern financial markets. First, it articulates a more robust theoretical framework for understanding complexity, financial innovation, and the relationship between these powerful market dynamics. This, in turn, facilitates an examination of the implications of complexity and financial innovation in terms of the ongoing debates respecting the optimal source, form and scope of financial regulation. It also facilitates an examination of both the shortcomings of the pre-crisis regulatory regimes governing OTC derivatives markets and, looking forward, the prospective strengths and weaknesses of embryonic post-crisis reforms. Finally, and more broadly, this thesis enhances our understanding of the relationship between the important insights of financial theory and how we conceptualize and pursue the objectives of financial regulation.