I have a feeling that the Fed's and the Senate's objection is the result of lobbying by players in this market, which consists of virtually every major financial institution in the world. Derivatives were invented for the purposes of hedging, but that only accounts for a minor percentage of the activity in common derivatives markets like futures and options. Greed accounts for the rest. Banks and institutions have found that derivatives are an excellent way to earn profits, and permit them
to bypass existing regulation that might bar them from investing in certain types of securities and from indulging in excessive speculation. But the reverse is equally true. Many institutions have taken hits in recent years, and most of these hits can be traced back to a lack of supervision and formal surveillance of trading activities, matters on which regulators should have a say.
The disagreement can be caused by a fight over jurisdiction, but in my mind the Commodities Futures Trading Commission is more qualified to regulate the OTC market, since they are already by definition regulating a derivatives market. However, that would be bad for the players, since they don't want their activities might come under public scrutiny, which might lead to dire consequences. What would you do if you found out that your bank is investing your nest egg in exotic swap transactions based on the value of the Rupiah? You would be scared and shocked, and take your money elsewhere.
Thus far, my feeling is that rising markets have rendered these transactions very lucrative to banks. When markets go the other way, we could be in for a nasty surprise. Derivatives are a financial disaster in the making, IMO. |
