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Strategies & Market Trends : John Pitera's Market Laboratory
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To: John Pitera who wrote (5201)12/7/2001 4:17:14 PM
From: Henry Volquardsen  Read Replies (3) of 33421
 
John,

Interesting article and not really a surprise. It is an issue all trading firms and innovative financial intermediaries deal with constantly.

As you know I traded long term interest rate and currency products. When new types of derivatives are developed or product extends to new currencies or maturities it always become an issue of how to get fair mark to market parameters. This becomes particularly problematic in markets with limited participants for reference purposes. Often the efforts and and any resulting mistakes are innocent and well intentioned. I remember back at our former employer an issue arose in the early 80s over what is now pretty straight forward net present value accounting. It was a mistake in mark to market of unrecognized future profits and effected earnings but there was nothing manipulative in its initial use.

So this situation will inevitably occur in new and developing markets. The solution is management that is competent in analyzing trading product. They have to be able to make their independant evaluation. You also need rigorous internal risk control procedures which focus not only on exposure but on profit recognition. And you need an accounting firm that has professionals trained in what to look for.

But ultimately from an investors perspective you need to make a judgement on management competence and willingness to spend money on internal controls.
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