Monday, May 09, 2005

Derivatives - BIS ( Bank for International Settlements )

The BIS says there are a total of about $300 trillion notional value worth of otc derivatives in the world. Despite saying in the past that otc derivatives should not be regulated, Greenspan is now acting concerned about them. I don't know why he bothers. I can not see him or any of the regulators doing anything about them. I'm not saying they should be regulated. In a truely free market most of the derivatives out there today would probably not exist, nor would the huge bond markets because interest rates would be so steady. There would not be any profits to be made trading bonds. In other words we would not have all these derivative nuetron bombs waiting to go off.

From Jim Sinclair's site, about derivatives

1. Have no regulators.
2. And therefore have no regulations.
3. They are not listed on any exchange.
4. There are no standard contracts.
5. There are no clearinghouse guarantees.
6. There is no transparency.
7. They are issued in most cases by subsidiaries of good name international investment firms - not the investment firms themselves.
8. There is no automatic guarantee mechanism between the parent and the subsidiary when it comes to trade debts.
9. A bankruptcy of the derivative-granting subsidiary would not be guaranteed by the holding company parent.
10. It is not possible to know the financials of a subsidiary of an SEC filing company as all that is required is for the parent to file if or not the subsidiary meets capital requirements - if there are any in the area they operate.
11. The subsidiaries are generally located in financial areas without capital requirements for financial commitments.
12. The financial capability of the performance of a derivative depends on the balance sheet of the loser on the contract.
13. Valuations are products not of a market but of a computer simulation based on assumptions inputted by the company doing the valuation for its own purposes.

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