The Obama administration continues to demonstrate their lack of understanding about a) how derivatives work, and b) their role in the crisis and collapse.
The proposals to regulate derivatives are weak and ineffective. CDOs and CDS may be trading at healthy discounts to their notational value, but at least Wall Street is getting 100 cents on the dollar for its lobbying efforts.
“The multitrillion-dollar derivatives market, which currently isn’t regulated, enables financial firms to speculate on whether stocks, bonds, currencies and natural resources, among other things, will rise or fall in value. A particular type of derivative called a credit-default swap exacerbated the financial crisis and contributed to the collapse of American International Group, which made bets on derivatives it could not afford. Credit-default swaps, which are linked to the value of bonds, would be overseen by the SEC under the proposed agreement . . .
Obama’s proposal calls for derivatives to be traded through “central clearinghouses,” which would collect data about the market and require that buyers and sellers allocate enough money to cover any trades.
Gensler wants to go a step further and require that derivatives be traded on electronic exchanges, just as stocks are traded on the New York Stock Exchange and the Nasdaq. A derivatives exchange would offer the advantages of a clearinghouse but also provide public information about the pricing and volume of trades.
Non-standard derivatives would be exempt from much of this regulation. These are derivatives linked to highly complex investments, such as securities composed of mortgages and other kinds of debt. But Gensler and Schapiro said it would be important to be vigilant about policing this market.”
No no no!
This is simple, people! Repeal the CFMA to begin with, put ALL derivatives on exchanges, require transparency and reserves.
Broad Agreement Reached on Derivative Oversight
Zachary A. Goldfarb
Washington Post, June 23, 2009