http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=200912021105dowjonesdjonline000515&title=ex-cftc-chairwoman-bornderivatives-must-be-regulated
WASHINGTON -(Dow Jones)- The former chairwoman of the Commodity Futures Trading Commission told a congressional committee on Wednesday the over-the- counter derivatives market has become "extremely dangerous" and must be reined in with regulation.
In her first testimony since leaving the helm of the CFTC during the Clinton administration, Brooksley Born warned the Congressional Joint Economic Committee that continuing to allow direct trading of over-the-counter derivatives, or contracts whose value change with the price of their underlying assets, without regulating them on an exchange poses "grave dangers to the economy," according to her prepared remarks.
Born urged lawmakers to model new laws regulating derivatives trading on those already in place governing the futures and options markets. All standardized derivatives should go through clearing operations and be traded on regulated exchanges, she recommended.
Both the CFTC and the Securities and Exchange Commission should have primary oversight of the derivatives market on and off exchanges. Also, she emphasized that no loopholes should be made for major companies to circumvent regulations on trading standard derivatives, and only limited exceptions should be permitted for those trading customized contracts outside of the exchanges.
As chairwoman of the CFTC, Born urged Congress to regulate the derivatives market as early as 1998, but her recommendations met fierce resistance from other Clinton economic advisers, including Treasury Secretary Robert Rubin and SEC chief Arthur Levitt, as well as former Chairman of the U.S. Federal Reserve Board Alan Greenspan.
"My voice was not popular," Born said in her remarks Wednesday. "The financial services industry argued that markets had proven themselves to be self- regulating and that the role of government in market oversight and regulation should be reduced or eliminated. All of us have now paid a large price for that fallacious argument
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Response by Riversider
about 16 years ago
Posts: 13572
Member since: Apr 2009
There is no “adequate justification” to let “purely
speculative” customized contracts be made over the counter, she
said. At least one party to every trade should be required to
certify that the contract is being used to hedge a bona fide
business risk.
Ignored comment.
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Response by GraffitiGrammarian
about 16 years ago
Posts: 687
Member since: Jul 2008
She will not be heard, alas, because to heed her warning would require that people pause to consider "the greater good." And anything labelled as such is sneered at reviled as "socialism."
Such is the ascendancy of greed and arrogance that nobody can argue for the common good any more.
Ignored comment.
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Response by somewhereelse
about 16 years ago
Posts: 7435
Member since: Oct 2009
"At least one party to every trade should be required to
certify that the contract is being used to hedge a bona fide
business risk. "
There is that word... should.
When naked short sales were banned, every short was supposed to be in relation to specific shares. Guess what happened... folks lied. Some shares were shorted by multiple people at the same time.
Devil is in the details...
Ignored comment.
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Response by Riversider
about 16 years ago
Posts: 13572
Member since: Apr 2009
"At least one party to every trade should be required to
certify that the contract is being used to hedge a bona fide
business risk. "
THE HONOR SYSTEM? WON'T WORK!! ASSUME THE WORST, HOPE FOR THE BEST. EXCHANGES & MARGIN DONE!
When, at the beginning of 2008, Antoine Castel took control of the fixed-income unit in Beijing of Calyon , the investment banking arm of Crédit Agricole, the world’s biggest banks were making fat profits in China’s nascent derivatives markets.
But just weeks into his new job at the French bank, Mr Castel watched in horror as Chinese companies began to lose billions of dollars on the bespoke trades they had struck with western dealers. It was the start of a chain reaction that this summer unleashed a fierce backlash from regulators and local banks.
In stark contrast to the slow pace of reform in derivatives markets in the US and Europe, China’s regulators have in recent months shut down the main route by which foreign banks sold derivatives from offshore operations and have banished speculative deals – moves that have important implications not only for Chinese companies and foreign banks, but also for the evolution of China’s capital markets and the internationalisation of the renminbi.
Chinese regulators suspect that in some instances companies used derivatives as a way to speculate, rather than hedge, while banks frequently sold overly complex products – the most profitable – without fully explaining the potential downside
Ignored comment.
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Response by Riversider
about 16 years ago
Posts: 13572
Member since: Apr 2009
WALL STREET INVENTS COMPLEX DERIVATIVES NOT TO HELP THE CUSTOMER BUT TO CONFUSE THEM!
Products with names such as “snowballs” and “snowblades” proliferated, many with so-called “zero cost” structures that failed to live up to their name. Dealers say billions of dollars of trades are being renegotiated in private, some under pressure from Sasac, the shareholder and regulator of hundreds of state companies.
There is no “adequate justification” to let “purely
speculative” customized contracts be made over the counter, she
said. At least one party to every trade should be required to
certify that the contract is being used to hedge a bona fide
business risk.
She will not be heard, alas, because to heed her warning would require that people pause to consider "the greater good." And anything labelled as such is sneered at reviled as "socialism."
Such is the ascendancy of greed and arrogance that nobody can argue for the common good any more.
"At least one party to every trade should be required to
certify that the contract is being used to hedge a bona fide
business risk. "
There is that word... should.
When naked short sales were banned, every short was supposed to be in relation to specific shares. Guess what happened... folks lied. Some shares were shorted by multiple people at the same time.
Devil is in the details...
"At least one party to every trade should be required to
certify that the contract is being used to hedge a bona fide
business risk. "
THE HONOR SYSTEM? WON'T WORK!! ASSUME THE WORST, HOPE FOR THE BEST. EXCHANGES & MARGIN DONE!
http://www.ft.com/cms/s/0/20eb4ca6-d861-11de-b63a-00144feabdc0.html
When, at the beginning of 2008, Antoine Castel took control of the fixed-income unit in Beijing of Calyon , the investment banking arm of Crédit Agricole, the world’s biggest banks were making fat profits in China’s nascent derivatives markets.
But just weeks into his new job at the French bank, Mr Castel watched in horror as Chinese companies began to lose billions of dollars on the bespoke trades they had struck with western dealers. It was the start of a chain reaction that this summer unleashed a fierce backlash from regulators and local banks.
In stark contrast to the slow pace of reform in derivatives markets in the US and Europe, China’s regulators have in recent months shut down the main route by which foreign banks sold derivatives from offshore operations and have banished speculative deals – moves that have important implications not only for Chinese companies and foreign banks, but also for the evolution of China’s capital markets and the internationalisation of the renminbi.
Chinese regulators suspect that in some instances companies used derivatives as a way to speculate, rather than hedge, while banks frequently sold overly complex products – the most profitable – without fully explaining the potential downside
WALL STREET INVENTS COMPLEX DERIVATIVES NOT TO HELP THE CUSTOMER BUT TO CONFUSE THEM!
Products with names such as “snowballs” and “snowblades” proliferated, many with so-called “zero cost” structures that failed to live up to their name. Dealers say billions of dollars of trades are being renegotiated in private, some under pressure from Sasac, the shareholder and regulator of hundreds of state companies.