UNFORTUNATELY, there is a huge amount of mis-information and negative spin about derivatives.
I am doing my best to dispell this with a new article on Financial Sense::

Fighting the Fear
Preventing a meltdown in OTC Derivatives

The Problem may be smaller than you think, but that may not Matter.

"The only thing we have to fear, Is fear itself" - FDR

The coming crisis in credit derivatives, is predictable. Just as the subprime problem was.

Why aren't the regulators acting now, to prevent the next predictable crisis from fanning out into something far worse? I have no idea. But rather than sitting back, and letting it happen again, I think the time has come for some serious truth-telling. If the global banks, rating agencies, and regulators will not tackle the job themselves, perhaps knowledgeable people with access to the media and the web, can get the facts out, and encourage a sensible course of action. My hope is that, if an understanding of the risks and possible solutions is spread widely enough, then perhaps the authorities will act in time, before it is too late, and the markets start reacting on fear and emotion.

// see: http://www.financialsense.com/fsu/editorials/2008/0605.html

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Elsewhere on HPC, there is a thread entitled:

Total Notional Value Of Derivatives



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I agree that derivatives have been misunderstood but i dont see that credit derivatives are necessarily misunderstood.

If we are talking about securitization of debt then perhaps for years and years this process will not be restarted? As i see it the idea that you can 'observe' a certain class of product as an investor and rely upon it without an in detail understanding the underlying securities, based on some other parties word it is as 'good as gold' is not going to fly again soon. Thats gone surely?

So we have a whole way of looking at credit creation that is gone and we have to return to more transparant - meaning more obvious - ways of valuing credit products so that the investor can easily do his due diligence with no reliance on somebody elses model.

I suppose the basic problem here is that these products are not likely to be tradeable electronically as if they represented cash as seemed to be happening with the earlier issues of these products? So risk returns more and more to the originator who cannot easily on sell his risk assessment to another for a profit. So banks that once profiting via the difference in margin on interest rates were profiting by fee creation with much lower risk to them.

So people talk about 'when the securitization market restarts'. Will it actually restart? And as that becomes clearer we could be in for a new leg down, (or recovery). If down then losses will have to be eaten. Some way of making money going forwards for insolvent originating banks will have to found. Their previous modus operandi was to borrow, extract fees, and sell on to another investor. I think that process is dead for now and possibly years to come.

In europe for example right now. for example, who other than the ECB is buying credit derivatives? So that banks can pass on the mortgages they create to some other party?

Is the securitization process frozen right now or it is working with difficulty?

If it is frozen then we *are* melting down until we have some process that looks at underlying values and says 'thats a sure thing investment' with almost no risk.

I confess i am a total ingoramous of the exact inside workings of this system we have in play now and yet my observations so far on this beast have not be so wrong.

"I suppose the basic problem here is that these products are not likely to be tradeable electronically "

Which type of credit derivative?

"In europe for example right now. for example, who other than the ECB is buying credit derivatives?"

Which type of credit derivative?

I'd be remarkably surprised if the ECB is involved directly with any credit derivatives... is involvement mentioned in any credible source?

Has the ECB not been involved in a realtively massive loan program using 'mortgage products' as security and other stuff since last August?

Do we not read in the papers that banks are now specifically tailoring their products so they can be accepted at the ECB?

http://www.euromoney.com/Article/1884656/A...both-hands.html

And i am sorry but i realise we are talking about repos here but this process has to continue until normal market operations return. But when will that happen?

Asset backed securities are not credit derivatives (in the commonly understood sense of the word). There are instruments called "synthetics" which simulate the payouts of asset backed securities using derivatives... these are explicitly excluded as acceptable assets in the context of the recent Bank of England interventions... so, I'm assuming, they would also be excluded by the ECB. If synthetics were accepted, then - in principle - an unlimited number could be created by investment bankers; swapped for cash/treasuries - then used to corner any market.

While repos are distinct from the Special Liquidity Scheme (at the BoE) I fully expect similar rules to apply when identifying "real" collateral.

Thanks for the clarification!