Derivatives Clearinghouses Are No Magic Bullet. Really ?

See: http://online.wsj.com/article/SB10001424052748703871904575216251915383146.html

Derivatives Clearinghouses Are No Magic Bullet. Really? but not for the reason this guy gives...and he is a professor at some big Ivy league School!

I read this article with a certain sense of bemusement at the level of ignorance the author therein demonstrated. He seems to have no understanding of issues of 2-timing, N-timing in bilateral netting agreements. The issues he worries about would be addresses in centralized or interconnected hierarchical clearing system as explained in my knol and powerpoint/ youtube presentation

References:

The Holistic Theorem

http://online.wsj.com/article/SB10001424052748703871904575216251915383146.html

Unity of Purpose

See more presentations by kongtcheu | Upload your own PowerPoint presentations

Editorial - Congress, the Banks and Derivatives - NYTimes.com

See my knol on the "Holistic Theorem"

This editorial makes a painfully & tragically poor traditional liberal argument for derivatives regulation even though the ultimate goal of regulating all derivatives trades is what is needed. It merely re-hashes the March 29,09 editorial piece. See:http://www.nytimes.com/2009/03/29/opinion/29sun1.html

They conclude by saying:
"Senator Tom Harkin has introduced legislation that would require exchange trading for derivatives. Representative Collin Peterson has introduced a bill that would tighten the regulation of derivatives’ clearinghouses. He acknowledges that his bill is not as strong as he would like but that Congressional politics left him no choice, telling The Times, “The banks run the place.”"

and I say: "duh"

In this specific instance, they fail to see that their is a unity of purpose between derivatives trading institutions and advocates of centralized clearing, and that is the most effective argument to be made in order to effect CENTRALIZED CLEARING OF ALL DERIVATIVES TRADES.

Why set yourself up for a fight against a party where the odds of winning are against you when you can simply & persuasively explain to the other party that it is in their best interest to switch to your side of the argument?
See:http://knol.google.com/k/phil-kongtcheu/the-holistic-theorem/24v2kgtuvzk2v/16

Note also that regulated BICs exchanges on different types of underlyings, by creating exchanges that most efficiently trade instruments that all customized derivatives merely combine would eliminate the loopholes of the proposed legislation

Financial Reforms We Can All Agree On - WSJ.com

Financial Reforms We Can All Agree On - WSJ.com: "6) Avoid grade inflation in rating agencies' opinions. Lots of bad ideas are surfacing about how to accomplish that goal, one of which is to require that buyers, not sellers, pay for ratings. This would not improve the reliability of ratings. Regulated, buy-side investors (banks, pensions, mutual funds and insurance companies) pushed for ratings inflation of securitized debts to loosen restrictions on what they could buy. Giving these buyers more power would not discourage ratings inflation. Another bad idea gaining ground in Europe is to have regulators micromanage the ratings process, which would be destructive to the ratings' content.

There are better alternatives, one of which is to force ratings to be quantitative. Letter grades have no objective meaning that can be evaluated or penalized for inaccuracy. Numerical estimates of the probability of default (PD) and loss given default (LGD), in contrast, do have objective, measurable meanings.

The Nationally Recognized Statistical Rating Organizations (NRSROs) whose ratings are used by regulators should provide specific estimates of the PD and LGD for any rated instrument (they already calculate and publicly report the necessary statistics). Requiring these organizations to express ratings using numbers could alter the rating agencies' incentives dramatically. If they were penalized for systematically underestimating risk over a significant period of time -- say, with a six-month 'sit out' from having their ratings used for regulatory purposes -- they would have a strong self-interest in correctly estimating risk."

-------------------------------------

Comment

The issue is not so much alphabetical versus numerical as it is an issue of further granularity in rankings
See my book chapter VIII:

 

My recent output on proposals for reform:

Unity of Purpose




http://www.youtube.com/watch?v=70ciLLjpS4U


http://www.authorstream.com/PresentLive/kongtcheu-179123-UnityofPurpose2-Business-Finance-ppt-powerpoint


http://www.authorstream.com/Presentation/kongtcheu-179123-UnityofPurpose2-Business-Finance-ppt-powerpoint/


Uploaded on authorSTREAM by kongtcheu


Too Big to Fail





http://www.youtube.com/watch?v=YzO6_CusfL8



http://www.authorstream.com/Presentation/kongtcheu-179114-TooBigtoFail-Business-Finance-ppt-powerpoint/

http://www.authorstream.com/PresentLive/kongtcheu-179114-TooBigtoFail-Business-Finance-ppt-powerpoint



Uploaded on authorSTREAM by kongtcheu

Senators Debate Fed's Role in Overseeing Systemic Risk - WSJ.com

Senators Debate Fed's Role in Overseeing Systemic Risk - WSJ.com
Reasonable debate to have. In my book BICs 4 Derivatives Volume I : Theory
(Chapter VIII, pp 192-195), I argued for a central counterparty organization as counterparty of reference on all trades which guarantees the payment of contractual agreements on both sides of a transaction.

The systemic risk overseeing entity should act as central counterparty of reference on all trades whose default may pose a systemic risk or act as a regulator and guarantor of last resort to private entities (exchanges, clearing houses,...) who play such a role.

As a guarantor of last resort, this entity may be best within FDIC; As guarantor of credibility through the power to print money, this entity may be best within the Central Bank authority. What is most important in my view is that its function be articulated as proposed above.