With the recent crisis in the financial markets, does anyone think it is possible that the regulators will force derivatives onto the exchanges? (Assuming it would even be possible)
It’s not possible. What are they going to do, say it’s illegal for people to trade OTC derivatives? Everyone would just move offshore and keep doing it.
even if not exchange traded…some sort of clearing house is in order
I like the Options Clearing Corp (OCC) model where they serve as the contra party to every trade (sell to the buyer and buy from the seller). This way there is transparency and people could easily monitor the various positions held. This would also be an easy way to establish position limits (enforced by an outside angencies).
SOME TYPE of Derivatives are already traded on the exchanges(Eurex, CME, etc.) What you’re referring to, i think, is OTC CDS. Yes, it’s possible. But unlikely to occur as the investment bank have a financial stake in keeping it off the exchanges. The buyers (hedge funds,etc ) wants it to go exchange. The exchanges, themselves, obviously want to tap into that market. ICE recently bought a CDS broker… which could pave the way to really establishing a market presence. The issue is liquidity, and lots of it. Unless investment banks agree to move some of their own volume (hearing rumor of JVs, profit split… wouldn’t read too much into them) to the exchanges, market will continue to be a OTC market. I dont understand JV’s offshore comment… people want CDS traded on exchanges (reduced counterparty risk).
Uh, the original post wasn’t about CDS; it was “derivatives”
And by everybody I guess you mean GS and MS. These OTC derivatives could be traded on Exchanges. I do not see why they couldn’t be. Obviously the way things are done now will be a thing of the past once the dust settles, especially since the fed or some other agency will be monitoring banks and counterparty exposure much more closely now. The argument they they will trade them off shore may work but if the fed puts in a back stop that says if you do that and are not transparent about the exact nature of the contract you will not be able to borrow money from us if the contracts go bad may solve that problem.
This thread keeps morphing. Is it about bank regulation?
I think what’s being said is that forcing firms to trade OTC derivatives on exchanges, or any functioning clearing house, can’t be done through direct regulation. However, the government or an independent regulatory body (I’ve heard that HFs have debated establishing their own self regulatory organization), may be able to exert enough pressure on the money centers, B/Ds, IBs, Banks (whoever is left standing when the smoke clears) to put these trades up for clearance. It seems to me that these OTC derivatives, mostly CDS, are basically holding the economy hostage. One of the reasons that we have to bail out all of these institutions is the amount of $ tied up in derivatives protecting their debt. What happens if the American auto’s go ch11? Is the system able to handle that sort of credit event? Posting these trades on an Exchange will allow the fed or whoever is reviewing this stuff to get their arms around exactly whats going on. Personally, I don’t think more regulation is needed – what’s needed is smarter, more efficient and, most importantly, more transparent financial markets.
So what we need is some kind of global re-insurer for CDSs. I suppose that’s what the Fed has been doing by accepting these as collateral. Now what are the banks giving the gov’t in exchange (I’m not being sarcastic… I’m just trying to think it through…). For AIG it was equity options. Is that the right way to do it?
forget about ‘re-insurance’ - that almost bought down lloyds of london in the early 90s’ … once a castrophic event happens diversification does not work … but I hear you … cds is useful, but not to be solely bore by an insurance company that also provides pensions… the risk does not match. then the monolines format did not work either … there has to be a lot of major changes … it would be short term view that ‘nothing is really broken’ … this crisis indicates somethings are really broken.