Posted on 09/14/2009 1:34:55 AM PDT by bruinbirdman
The global market for derivatives rebounded to $426 trillion in the second quarter as risk appetite returned, but the system remains unstable and prone to crises, according to the Bank for International Settlements (BIS).
The BIS said in its quarterly report that total turnover of derivatives rose 16pc, mostly due to a surge in futures and options contracts on three-month interest rates.
Stephen Cecchetti, the bank's chief economist, said over-the-counter markets for derivatives are still opaque and pose "major systemic risks" for the financial system. The danger is that regulators will again fail to see that big institutions have taken far more exposure than they can handle in shock conditions, repeating the errors that allowed the giant US insurer AIG to write nearly "half a trillion dollars" of unhedged insurance through credit default swaps.
The misjudgement was to think the banks and insurers were safe because their "net" exposure was modest. That proved to be an illusion.
"The crisis has cast doubt on the apparent safety of firms that have small net exposures associated with large positions," Mr Cecchetti wrote. "As major market-makers suffered severe credit losses, their access to funding declined much faster than nearly anyone expected. When that happened, it was gross exposure that mattered.
"The use of derivatives by hedge funds and the like can create large, hidden exposures," he added, citing the discovery that firms in Brazil, Korea and Mexico held huge foreign exchange contracts in late-2008.
"Experience during the crisis points to the need for fundamental improvements in the management of counterparty risk."
(Excerpt) Read more at telegraph.co.uk ...
What’s the use in aiming your spit?
I say it lands there.
Only when the tide goes out do you discover who's been swimming naked.
They’re nude. All nude.
Thanks for the ping.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.