Contrary to several opinions I've seen posted here, the US Federal Reserve is very much aware of the international/domestic swaps and derivatives exposures as are the major participants in these markets. In stark contrast is the very evident lack of knowledge being portrayed by the current CFTC Chairperson. More than likely, her continued ignorance of these issues will potentially foster sunset hearings for the CFTC and, at the very least, further erode its regulatory authority.
Check out the Fed regulatory manual on capital market trading activities here
bog.frb.fed.us
For a recent speech by a Fed Governor, who understands derivative risk and used to Chair the CFTC, try the following
bog.frb.fed.us
To be sure, some derivative losses due to credit deterioration are always a possibility, but the market quickly restricts credit to unworthy institutions. In general, one can create the same risk position in the cash market as through a derivatives transaction. Its just cheaper to use the latter if you have the proper credit rating.
Regarding rupiah derivative losses in the Far East, that is an
Indonesian banking regulation problem. Neither the US Fed nor the
CFTC would have any jurisdiction there. If they had, the Indonesia
problem would never have occurred in the first place. Similarly, the Japanese banking insolvency questions would have been resolved years ago if the US Fed had oversight responsibilities there.
Many investors view derivatives as "the Boogie Man" when in fact the underlying risk simultaneously permeates balance sheets that only use the cash markets. Its the risk, measurement and the management of that exposure that creates losses and gains. If a firm can't manage that exposure it deserves to go out of business IMHO since its a waste of scarce resources. Markets always punish ineptitude.
Thus, Orange County, P&G, and Barings....these were management problems, not derivatives problems. Sooner or later
ignorance pays for its lack of education or foresight.
IMO, derivatives are not "the problem", inept foreign bank regulators and bureaucrats are. Japanese banks can hide derivative exposures as well as bad loans. They can hide payola and bribes and anything else they want to if regulators and accountants acquiesce.
In general, derivatives are just a cost effective tool responding to the market risks rather than creating them. I for one don't believe that wet sidewalks cause rain.
FWIW. Have a good weekend everybody. |
