It wasn't that long ago that derivatives were the poor cousins of the securities world. Everybody else was so focused on equities and fixed income. Today credit derivatives volumes are growing faster than the economies of China and India combined, with business in credit default swaps growing by 52% in the first six months of this year to $26 trillion, according to ISDA.
But with "speculative fiascoes" such as those embodied by Enron and LTCM still fresh in the minds of regulators and those ever-cautious bankers that equate some aspects of the derivatives business with gambling, it seems the SWIFT banking community are getting a tad nervous.
In addition to "train wreck" other colourful adjectives that were used to pepper the debate about derivatives in the closing plenary included "a big mess," which was Jacques-Philippe Marson, president and CEO, BNP Paribas Securities Service's reference to certain aspects of the credit derivatives markets, which he said were largely dominated by hedge funds that were less concerned about the middle and back office (in other words automation and settlement risk).SWIFT has established an Alternative Investment Advisory Group to look at risk and automation issues in areas such as derivatives.
The Depository Trust and Clearing Corporation in the US has announced plans to create a central information warehouse and support infrastructure for automating over-the-counter derivatives.
So are derivatives a train wreck waiting to happen or is the level of risk being over hyped by analysts? Post a comment by clicking on the link below.
1 comment:
I have enjoyed reading your blog.
A train wreck seems inevitable because economic systems are complex and our risk management approaches will never have the "requisite variety" to manage them.
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