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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: pater tenebrarum who wrote (32645)10/31/2000 1:48:46 PM
From: LLCF  Read Replies (1) of 436258
 
<The more I think about HR4541 and what has been said about it the more uneasy I get. I note the quote "...and Federal Reserve Chairman, Alan Greenspan, have been lobbying Congress to approve legislation dealing with a potential derivatives crisis...". Is that the same Alan Greenspan who said a few months ago that derivatives did not create a risk because they were "a zero sum game." If that was the case why do they suddenly need this legislation.

If the statement was true and derivatives are a "zero sum game then there is no need for HR4541 at all. All that any legislation can do is to make the zero sum game into a "win/lose game" by protecting one side ( the loser ) to the detriment of the other party ( the winner ) . Despite the stated purpose of "to avoid tying up trading contracts in bankruptcy proceedings" the actual effect would be to limit the losses incurred in the bad trade and protect the assets of the institution which made that trade. >

This logic is flawed.... netting simply avoids going through a bankrupcy proceeding taking each contract alone and assessing it's standing. Instead the 'net' with each institution is taken. So for example when these banks market make in this OTC stuff, they may have longs and shorts in exactly the same contract [Dec 31 '02 Gold] with the SAME BANK! ie. when they write up a sell of Xoz of gold with Solly, they don't go through some file to see if they're already long gold from solly and rip that one up! Even if it is the same date etc.

Without netting, in a Bankrupcy, there can be arguments that each of these contracts is separate and distinct, so dates of trades can be important vs claims elsewhere on the balance sheet on earlier dates, etc. With listed securities this is already done for you, that's all... they're trying to make the OTC market like the listed one, autonetting. You can see why the exchanges don't like it... takes away their competative advantage.

This is still zero sum, etc etc... this guy is a bone head IMO.

Now, that's not to say that this "hurry up and pass the law" is not suspicious.

DAK
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