we moved. latest posts below:

9.18.2009

CEO of International Swaps & Derivatives Association says trust us

From the Bond Buyer:

But Robert Pickel, the ISDA’s CEO, told members of the House Agriculture Committee yesterday, “Not all standardized contracts can be cleared.” Pickel said that derivatives contracts that are infrequently traded, even if they have standardized economic terms, “are difficult if not impossible to clear” because a central counterparty clearing facility’s ability to clear a contract depend on such factors as liquidity, trading volume and daily pricing. This “makes it difficult for a clearinghouse to calculate collateral requirements consistent with prudent risk management,” Pickel said.

“End-users are not systemically significant and ­regulations intended to improve stability and decrease systemic risk should not ­apply to them.” Jonathan Short, senior vice president and general counsel of the ­IntercontinentalExchange Inc., also said Congress should focus regulation on the segments of the market where risk is greatest. “Mandating that interdealer and major swap participant trades be cleared would eliminate the bilateral counterparty risk that was central to the liquidity crisis that occurred last year,” he said. Pickel also argued against mandatory exchange trading of OTC derivatives, warning it “would undercut their very purpose: the ability to tailor custom risk-management solutions to meet the needs of end-users.” Dan Budofsky, a partner at Davis Polk & Wardwell LLP, who testified on behalf of the Securities Industry and Financial Markets Association, agreed that “it may be more appropriate for products that trade less frequently to trade over-the-counter.”

Witnesses also challenged the Treasury’s plan to impose capital requirements on cleared swap transactions. This would require the end-user businesses to post collateral for the swaps, Budofsky said. Collateral requirements for corporate end-users “would create a significant ­disincentive to use swaps to manage risk,” he said.
I have a business proposition for you.

Send me money to insure your house. As long as nothing goes wrong we'll be fine. If something does go wrong, that's ok, I'll be fine cuz I've collected the premiums from you. You'll be screwed if you have any losses since I never set aside enough collateral to cover anything . [Think: AIG.]

Blog Archive