IT'S NOT ABOUT THE MARKET...:

New Rules for Derivatives (NY Times, 5/15/09)

In apparent deference to those who have made major profits from unfettered derivatives trading, the proposal stops shy of creating a fully transparent market.

Transparency is the best way to avoid a repeat of the disaster triggered in recent years by these unregulated financial products, which are supposed to help investors manage risks, like the possibility of default or of interest-rate swings. As the financial bubble burst mid-decade, many of these derivatives didn’t work as advertised. Rather than reduce risk, they created or amplified it, to the point — as in the case of the American International Group — that the failure of one party to various derivatives contracts threatened to topple the entire system. [...]

For all that, the proposal pulls its punches. It does not call for trading derivatives on fully regulated exchanges, the most visible and reliable way of reining them in. It also makes a distinction between standardized and customized derivatives and proposes a lighter regulatory touch for the custom variety. That could open the door to gaming the new system, a door that would be shut if all derivative contracts were traded on exchanges. In some important respects, it appears to give regulators the discretion, though not the duty, to police markets more closely.

The proposal also seems to invite tension between the Securities and Exchange Commission and the Commodity Futures Trading Commission, the main regulators that would oversee derivatives. Regulatory jurisdiction must be clarified if the new rules are to have any teeth.

,,,but about what's being marketed. Go to the grocery store and every prepared food lists all its ingredients. Buy derivatives to protect yourself from financial ruin and none are. Make the product transparent.

Posted by Orrin Judd at May 15, 2009 7:34 AM