By Abigail Moses
Sept. 14 (Bloomberg) -- Central banks must coordinate global supervision of derivatives clearinghouses and consider offering them access to emergency funds to limit systemic risk, according to the Bank for International Settlements.
Regulators are pushing for much of the $592 trillion market in over-the-counter derivatives trades to be moved to clearinghouses which act as the buyer to every seller and seller to every buyer, reducing the risk to the financial system from defaults. The drive was spurred by the collapse of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the biggest credit-default swaps traders.
“The crisis has exposed the need for international coordination of the oversight of systemically important” clearinghouses, BIS analysts Stephen Cecchetti, Jacob Gyntelberg and Marc Hollanders wrote in a report published late yesterday. An important and unresolved question is whether clearinghouses “should have access to central bank credit facilities and, if so, when,” they wrote.
JPMorgan Chase & Co., Goldman Sachs Group Inc. and 13 other derivatives dealers last week told the Federal Reserve Bank of New York they will submit 95 percent of new credit-default swaps trades to clearinghouses. They made similar commitments for interest-rate derivatives.
Intercontinental Exchange Inc., owner of the largest credit-default swap clearinghouse, said last week it will make it easier for hedge funds and other bank clients to access its service to guarantee trades starting next month.
‘Fundamental Improvements’
The Basel, Switzerland-based BIS was formed in 1930 to monitor financial markets and regulate banks.
“Experience during the recent crisis points to the need for fundamental improvements in the management of counterparty risk and transparency in OTC derivatives markets,” the analysts wrote.
Clearinghouses are not sufficient to ensure the “resilience and efficiency of derivatives markets,” according to the report. There needs to more use of automated trading, a central database for trades, enhanced risk management and greater disclosure requirements on traders, according to the report.
Derivatives are contracts whose values are tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
Mountain Of OTC Derivative WMDs Waiting To Explode
RispondiEliminaDear Friends,
Size and major risk has been confirmed for those with the eyes to see and the ears to hear. It is exactly what I have been teaching.
Translation:
Unless financial contracts have standards there is no way to clear them.
Unless financial instruments have accurate means of daily valuation, there is no way to clear them.
OTC derivatives outstanding from 1991 to 2008 have no standards.
OTC derivatives outstanding from 1991 to 2008 have no sound means of true valuation in any time frame, certainly not from day to day.
With this being the incontrovertible set of facts:
The Bank for International Settlements is for the first time proposing the world's central banks take over the financial risk of the entire mountain of more than one quadrillion one hundred and forty four trillion dollars (valuation before the change to "value to maturity" method valuation of nominal value of OTC derivatives) of OTC derivatives created from 1991 to 2008.
The reason is simple. This unchanged in size mountain of weapons of mass financial destruction as still sitting there ready to explode in the second chapter of the greatest double dip depression of 2007 - 2009.
Can you blame China for simply saying no to Western crack cocaine finance?
Now do you understand why China is buying raw materials, entering joint ventures and purchasing energy and raw material companies while utilizing their dollar instruments for payment?