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Thursday, April 20, 2006

otc Derivatives War Games

Europe simulates financial meltdown
By George Parker in Vienna

VIENNA -- Europe's financial regulators have held a "war game" exercise, simulating a continent-wide financial crisis, amid fears they are ill- prepared to stop a problem in one country spreading across borders.

“However, the report warned that hedge funds and credit derivatives were sources of concern "as related risks remain opaque and they have become extremely relevant in assessing financial stability both across borders and across all financial sectors."

It said that, while hedge funds could contribute to market efficiency, they "can also be sources of systemic risks."

Credit derivatives markets were said to have grown by 128 percent in 2005 compared with the previous year, with a nominal value of 12,430 billion Euro ($14,900 billion, £8,700 billion) in June last year. ...
https://registration.ft.com/registration/barrier?referer=http://www.jsmineset.com/ARhome.asp?VAfg=1&RQ=AR,1&ARList=1&cTID=0&cCat=&PRID=0&cSubCat=&Full=1&Archive=&ArtSel=$$$3596$$3595$$3594$$3593$$3592$$3591$$3590$$3589$$3588$$3587$&location=http%3A//news.ft.com/cms/s/66c09a88-c802-11da-a377-0000779e2340.html

"Be prepared for a crisis, EU regulators are told"
http://business.timesonline.co.uk/article/0,,13130-2124232,00.html

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It looks like some in the financial industry think that there still are not enough otc derivatives in the world: "exotic equity derivatives ..."

BNP Paribas to Hire 200 People to Boost Equity Derivatives Team
http://www.bloomberg.com/apps/news?pid=10000085&sid=aU5ORaIqPrEQ&refer=europe

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http://today.reuters.com/investing/financeArticle.aspx?type=fundsNews2&storyID=2006-04-18T193414Z_01_N18366037_RTRIDST_0_ECONOMY-FED-RISK.XML
Hedge funds in view as Fed ponders systemic risk

...

Gathered at a two-day conference hosted by the Federal Reserve Bank of Atlanta on systemic risk, senior policy-makers said that the unregulated activities of hedge funds could have serious implications which are still not well understood.

"There is a dark side connected to financial integration. If shocks are large enough, the financial system becomes a risk-transmitter rather than a risk-disburser," said Nigel Jenkinson, a director of the Bank of England.

"We may have fewer systemic events, but they will be larger," he told a dinner at the Atlanta Fed on Monday.

...

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Tidbit from the Cafe:

"You have to wonder what cigarettes these people are smoking! As long the world economy is growing then the debt and the trade imbalances are just fine! Has no one realized that this is a giant Ponzi scheme, or Enron style accounting. The financial system creates debt and reports it as income and then tells everyone that the debt doesn’t matter. Great scheme until the day that it doesn’t fool anybody anymore.

The IMF chief Rodrigo Rato seems to have understood "I find these views optimistic to the point of willful blindness," he said, referring to the idea that the imbalances could either go on indefinitely or dissipate painlessly."

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