Thursday 14 May 2009

A regulated CDS market

Did you read it too?

The Obama administration on Wednesday
unveiled a sweeping plan to regulate OTC derivatives in a move to increase transparency and reduce risk in a largely unregulated market worth more than $680,000bn. The new rules would force “standardised” OTC derivatives to be cleared through central clearinghouses to reduce the risk of investors being over-exposed to a single counterparty. The plan could force banks and other big corporate users of derivatives to set aside more capital to cover potential losses.

680.000 billion USD is 680 trln USD. That’s notional value. Real market value of the derivatives contracts is estimated around 13 to 15 trln USD. However: you’re never sure these days. Another thing with these contracts is that it is a zero sum game. For every buyer, there’s a seller. What these contracts actually do is transferring wealth between parties. And they can destroy the market for particular bonds or sectors, because sometimes CDS amounts are a multiple of the underlying bond issue they covering.
So yes indeed, if this market is regulated in an intelligent way, it will clean one of the biggest threats of the financial crisis.
Aaargggh – finance and intelligence don’t work well together. Greed, theft, GS on the contrary ….
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