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B I S Propose Central Banks Back-stop Entire Derivatives Market

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http://www.bloomberg.com/apps/news?pid=206...id=a5C6ARW_tSW0

Sept. 14 (Bloomberg) -- Central banks must coordinate global supervision of derivatives clearinghouses and consider offering them access to emergency funds to limit systemic risk, according to the Bank for International Settlements.

Regulators are pushing for much of the $592 trillion market in over-the-counter derivatives trades to be moved to clearinghouses which act as the buyer to every seller and seller to every buyer, reducing the risk to the financial system from defaults. The drive was spurred by the collapse of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the biggest credit-default swaps traders.

“The crisis has exposed the need for international coordination of the oversight of systemically important†clearinghouses, BIS analysts Stephen Cecchetti, Jacob Gyntelberg and Marc Hollanders wrote in a report published late yesterday. An important and unresolved question is whether clearinghouses “should have access to central bank credit facilities and, if so, when,†they wrote.

In other words, in order to prevent systemic risk BIS wants you and I (taxpayer) to provide a back stop to the derivatives contracts via the Central Banks backstopping the derivatives clearing houses.

That's very generous of them. :ph34r:

What could possibly go wrong?

Edited by Red Karma

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It is scary that this is coming from the BIS, they are the seriously big boys and I guess they don't like what they are seeing :ph34r:

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It is scary that this is coming from the BIS, they are the seriously big boys and I guess they don't like what they are seeing :ph34r:

It's contained...

[/cgnao]

Seriously though, if we have to bail this shit out, will they stop doing it?

[/naive]

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I thought outstanding derivatives were 'worth' something like 1.5 quadrillion. If they are in even the tiniest amount of trouble there quite literally isn't enough money in the world to bail them out.

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It's contained...

[/cgnao]

Seriously though, if we have to bail this shit out, will they stop doing it?

[/naive]

Yep, our Socialist rulers are waiting for the banking elite to start feeling guilty and change their ways. That's what happens when you bail people out, they feel remorse and don't do it again it says so in my dreams.

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It is scary that this is coming from the BIS, they are the seriously big boys and I guess they don't like what they are seeing :ph34r:

If you want to be even more scared, note that the guy drafting the new regulations, under Timmy Geithner and the G20, is a chap named Draghi, who is an ex Goldman Sachs executive...

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I thought outstanding derivatives were 'worth' something like 1.5 quadrillion. If they are in even the tiniest amount of trouble there quite literally isn't enough money in the world to bail them out.

But, but, I thought they netted to zero?

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If you want to be even more scared, note that the guy drafting the new regulations, under Timmy Geithner and the G20, is a chap named Draghi, who is an ex Goldman Sachs executive...

We are doomed, doomed i tell you!

PS Welcome to the board Toto. :D

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If you want to be even more scared, note that the guy drafting the new regulations, under Timmy Geithner and the G20, is a chap named Draghi, who is an ex Goldman Sachs executive...

Yep. Mario Draghi, head of Banca d'Italia, the Italian Central Bank. Of course he's ex GS.

Mario Draghi

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muwahahahahahahahahahaha

100% correct, guaranteed. :ph34r::ph34r:

got silver & gold ?

First, let's dispel some myths about the derivatives market. The trillions quoted are the notional being traded, not their "worth" or value - if you do a $5 billions USD Libor swap, your exposure is not £5 billion, but rather a fraction of that, 2-3% of the notional and then that also depends which way round you are on the trade, hedging etc.

So, yes, quadrillions sounds scary but the reality is quite different - sure a Lehmans or AIG can find itself massively the wrong way and wipe out it's capital, but someone has to be gaining the equivalent net of transaction costs on the other side.

Which leads to the next risk, one that would be addressed with a central clearinghouse, namely counter-party risk. The failure of Lehmans and AIG had it been allowed to happen would have caused systemic risk as the bank's on the other side of their trades would have no counter-party to pay them out thus having to write down their capital further. A central clearinghouse does away with counter-party risk insofar as there is a central pool.

Now you can argue the market participants should fund the clearinghouse pool via a small fee for every trade cleared rather than central banks, but it is better to have one than not at all.

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First, let's dispel some myths about the derivatives market. The trillions quoted are the notional being traded, not their "worth" or value - if you do a $5 billions USD Libor swap, your exposure is not £5 billion, but rather a fraction of that, 2-3% of the notional and then that also depends which way round you are on the trade, hedging etc.

So, yes, quadrillions sounds scary but the reality is quite different - sure a Lehmans or AIG can find itself massively the wrong way and wipe out it's capital, but someone has to be gaining the equivalent net of transaction costs on the other side.

Which leads to the next risk, one that would be addressed with a central clearinghouse, namely counter-party risk. The failure of Lehmans and AIG had it been allowed to happen would have caused systemic risk as the bank's on the other side of their trades would have no counter-party to pay them out thus having to write down their capital further. A central clearinghouse does away with counter-party risk insofar as there is a central pool.

Now you can argue the market participants should fund the clearinghouse pool via a small fee for every trade cleared rather than central banks, but it is better to have one than not at all.

Ok.

Question 1) Where are you getting the notional $5 billion from? Real money? Borrowed?

Question 2) Even if the exposure is only 2 or 3 percent, that 2 or 3 percent is still equal to the total GDP of the entire planet. Isn't that, kind of a BIG risk in absolute terms?

Question 3) Doesn't being a derivative trader by default mean that you are too big to fail? If any one of the players goes down the whole system collapses like dominoes.

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First, let's dispel some myths about the derivatives market. The trillions quoted are the notional being traded, not their "worth" or value - if you do a $5 billions USD Libor swap, your exposure is not £5 billion, but rather a fraction of that, 2-3% of the notional and then that also depends which way round you are on the trade, hedging etc.

So, yes, quadrillions sounds scary but the reality is quite different - sure a Lehmans or AIG can find itself massively the wrong way and wipe out it's capital, but someone has to be gaining the equivalent net of transaction costs on the other side.

Which leads to the next risk, one that would be addressed with a central clearinghouse, namely counter-party risk. The failure of Lehmans and AIG had it been allowed to happen would have caused systemic risk as the bank's on the other side of their trades would have no counter-party to pay them out thus having to write down their capital further. A central clearinghouse does away with counter-party risk insofar as there is a central pool.

Now you can argue the market participants should fund the clearinghouse pool via a small fee for every trade cleared rather than central banks, but it is better to have one than not at all.

I love the way you talk about Leymans going down as:

'yeah, sure this type of stuff can happen'

over a 100 years of financial history from one of the largest investment banks in the US, a primary dealer in the U.S. Treasury securities market, wiped out in under 2 days. Yeah, no need to worry then.........it's not really that bad. Not to mention the other huge financial organisations that have been bailed......yeah, it's not reallt too bad..... :lol::lol::lol:

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I love the way you talk about Leymans going down as:

'yeah, sure this type of stuff can happen'

over a 100 years of financial history from one of the largest investment banks in the US, a primary dealer in the U.S. Treasury securities market, wiped out in under 2 days. Yeah, no need to worry then.........it's not really that bad. Not to mention the other huge financial organisations that have been bailed......yeah, it's not reallt too bad..... :lol::lol::lol:

I think your a drama Queen, nothing bad happened. :P

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Ok.

Question 1) Where are you getting the notional $5 billion from? Real money? Borrowed?

Question 2) Even if the exposure is only 2 or 3 percent, that 2 or 3 percent is still equal to the total GDP of the entire planet. Isn't that, kind of a BIG risk in absolute terms?

Question 3) Doesn't being a derivative trader by default mean that you are too big to fail? If any one of the players goes down the whole system collapses like dominoes.

1) You don't have to have $5 billion set aside, just the collateral to cover the possible 2-3% and that is assuming the position isn't hedged, which they usually are. It can be either borrowed or owned capital, doesn't really matter.

2) 3% of $5 billion is circa $180 million off the top of my head, hardly equal to the $50 trillion GDP of the entire planet. Also, you seem to not understand derivatives are a zero-sum game, you can't lose $180 million without someone else making it, unless counterparty risk is not accounted for, hence the clamour for central clearing houses.

3) I think in the absence of a mitigating factor for counterparty risk, this is what happened last year, so kind of proves the need for clearinghouse which neutralises the "too big too fail argument".

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1) You don't have to have $5 billion set aside, just the collateral to cover the possible 2-3% and that is assuming the position isn't hedged, which they usually are. It can be either borrowed or owned capital, doesn't really matter.

2) 3% of $5 billion is circa $180 million off the top of my head, hardly equal to the $50 trillion GDP of the entire planet. Also, you seem to not understand derivatives are a zero-sum game, you can't lose $180 million without someone else making it, unless counterparty risk is not accounted for, hence the clamour for central clearing houses.

3) I think in the absence of a mitigating factor for counterparty risk, this is what happened last year, so kind of proves the need for clearinghouse which neutralises the "too big too fail argument".

Hmm...if 3% of $5bn is $180m it's no wonder they're a zero sum game.

But if they're a zero sum game why is the BIS proposing that the Central Banks agree to act as bottomless pit of next resort?

Edited by Red Karma

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Hmm...if 3% of $5bn is $180m it's no wonder they're a zero sum game.

But if they're a zero sum game why is the BIS proposing that the Central Banks agree to act as bottomless pit of next resort?

Because is reality if the contract says £500 million and something goes wrong, you better have it.

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Yep, our Socialist rulers are waiting for the banking elite to start feeling guilty and change their ways. That's what happens when you bail people out, they feel remorse and don't do it again it says so in my dreams.

This new interpretation of aversion therapy is all the rage - treat continued risk-taking behaviour with ongoing provision of that which permits the behaviour.

Feel the justice you naughty bankers.

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no backing. the maths genii have worked it all out....they insure a risk with a product that is like insurance but isnt, because its a bet and it gets laid off and ends up back on their desk...the risk is amongst 50 players.

so the event occurs....all 50 lose a bit....why not? cant they afford to lose a bit...theyve all made their fees....course, if you are like some of the merchants and your bonuses are higher than your profit...well, some are going to go bust....so what...let them bust.

If the system is so stable and efficacious, then why the frack should anyone else back it up to save a few bankers who want to retires multimillionaires at 40.?

there MUST be some banking losers. somewhere?

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