Whalen: Make Derivative Pricing Models Public

Mind Over Market ^ | July 13, 2009 | Robert Stowe England

[WashingtonSource]

Congress should compel over-the-counter (OTC) derivatives dealers to publish monthly the pricing models they use or register the models with the Securities and Exchange Commission, says risk analyst Christopher Whalen. Disclosure will reduce the complexity of derivatives. Even so, an outright ban is preferable to eliminate the "horrible damage" they have inflicted on the global financial system, Whalen contends in his written answers to 33 questions submitted by a Senate panel following his testimony last month.

Mind Over Market has obtained a copy of Whalen's letter containing the Senators' questions and his answers, and has published the entire text below. In his answers, Whalen further opposes the agreement between the New York Fed and the banks that deal in OTC derivatives to clear trades through the Intercontinental Exchange (ICE), a start-up he says is controlled by the banks and which shares half its profits with the banks. This agreement, while ostensibly putting in place a necessary clearinghouse mechanism, fails to run trades through an independent exchange, such as the Chicago Mercantile Exchange or the New York Stock Exchange. Thus, it fails to achieve the important goal of reducing systemic risk, Whalen argues.

[WashingtonSource]

The fox is guarding the hen house!

[Buckeye McFrog]

almost nobody would be able to understand them, even if they did

[WashingtonSource]

I know I wouldn’t understand them without a risk analyst to walk me through one of them. But, perhaps sophisticated investors who are in the market for a contract to buy insurance or even stupid companies like AIG who have provided the insurance might be able to hire people who can do some due diligence if the models are published.