Peak Oil News and Message Boards

vtsnowedin wrote:

Newfie wrote:What will Drive it is what crashes all Ponzi schemes. When you can’t find enough converts to prop up the fake earnings.

I don’t expect to convience you, nor you me.

Perhaps you meant convince?
Dam you auto correct!!!

ralfy wrote:In any event, I think anyone will have a lot of difficulty explaining how present credit levels can be backed up by physical assets.

Cog wrote:CDS works like this. Let's say Newfie buys a corporate bond in Apple with a return of 6%. But Newfie is nervous that Apple can't pay that 6% or even worse defaults completely on paying back Newfie principal. Cog says for a small monthly payment I will make you whole if Apple defaults. That is all well and good up to point that Apple does default and Cog doesn't really have the money to make Newfie good.

Cog wrote:This is true, which is why there are now restrictions on CDS and reserve requirements in place now that we're not in place in 2007. Stress tests on banks are a good example.

CDS exposure has fallen from 61 trillion in 2007 to 9 trillion in 2017.

Pops wrote:I realize this is an old conversation but thought I'd just chime in and try for a simple definition.
Derivatives are contracts whose value is derived from an underlying asset but which otherwise have no connection or claim on that asset.

Let's say you loan someone money @10% to buy a car. You keep the title as security, it's a securitized loan.
But you are worried rates may rise. So to hedge your risk that the cost of money might rise above say 8%, you make a contract with a different party who will pay you some amount if rates rise. In return you pay some set fee every month or whatever. That person has no claim on the car directly, no involvement in the original loan whatsoever, the whole contract is derived from an interest rate benchmark. it's insurance. It's a bet.

Whatever you call it, it's not backed by anything except the contract. The reason there can be such a ridiculous total value of 1,600T or whatever is these bets can be made on anything, oil futures, the weather, stock options exchange rates. And they can all be stacked one atop the other, the car loan can be hedged, swapped, futured... then those contracts can be used in trances to be combined or split and hedged again until nothing recognizable remains of the original transaction. Who would even know how many bets that one car loan is the focus of?

I think that's how it works

Read The Big Short by Michael Lewis, really great book about how the subprime banks lost their ass selling swaps.

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Certain reforms, however, remain controversial. Still others are not yet implemented, or are still in the process of implementation. The leadership of the regulatory agencies responsible for the Dodd-Frank reforms will change in the new administration, and may reconsider or halt new or expanded regulations that have not yet been implemented, or delay the timing of some reforms. In addition, regulators may also seek to not impose, or to roll back, other more controversial changes.

Regulation AT. The CFTC’s proposed regulations relating to high-frequency and other electronic trading, known as Regulation AT, have been controversial and criticized by many market participants. It seems likely that this regulation may be delayed, withdrawn or significantly watered down, especially regarding the most debated aspects of the proposal, such as the requirement to submit source code to the CFTC.[1]
Position Limits. The CFTC has sought for several years to impose new, more restrictive position limits on a range of commodity futures contracts, in the face of significant opposition from market participants. Such an expansion of position limits may be less likely in the new administration. Recently, the CFTC has reproposed these rules, opening up a new comment period that will extend beyond the inauguration and grant the new administration significant influence over the final version of the rule, if any.
Swap Dealer Threshold. Under Dodd-Frank and current CFTC regulations, the current “de minimis” exception from swap dealer registration of $8 billion is scheduled to be significantly reduced at the end of 2018 to $3 billion. It may now be more likely that the current exemption level is extended or established as the permanent threshold.
Regulation of Security-Based Swaps. To date, the SEC has not implemented most of the Dodd-Frank reforms relating to security-based swaps. It is not clear whether the new leadership at the SEC will be interested in completing such reforms, and if so on what timetable. At a minimum, the SEC may need to take action as exemptions previously granted from the application of the securities laws to security-based swaps expire.
Margin for Uncleared Swaps. Implementation of new margin requirements for uncleared swaps continues, with an upcoming March 1, 2017 deadline in the US and other major jurisdictions for required posting of variation margin in transactions with financial entities. In a recent speech, CFTC Commissioner Giancarlo called the deadline “unrealistic” and asked his fellow regulators to consider the “market’s readiness and help ease the transition” to ensure the market’s continuing functionality.[2] In light of the numerous regulators involved, the prospects for any delay in these requirements are uncertain.
International Cooperation, Conflicts, and Harmonization. Dodd-Frank was enacted in the wake of the financial crisis and commitments among the G-20 countries to implement certain financial reforms. The implementation of Dodd-Frank, particularly the derivatives reforms, has generated a significant amount of conflict and complaints from other countries, and from internationally active institutions, over suggestions that the US requirements have gone too far and have an excessive extraterritorial effect. During the implementation process, there have in particular been disagreements between the US and EU over equivalence of their respective regulatory regimes and cross-border recognition of registrants. Rolling back Dodd-Frank requirements may reduce some of this conflict, but may also raise new questions as to whether US requirements are equivalent to those of other jurisdictions. It may also cause other countries to reconsider aspects of their own regulations. Market participants will worry about whether such changes undermine existing equivalence and/or substituted compliance, or will make it more difficult to obtain equivalence and/or substituted compliance in the future.
Resolution and Recovery. Congressional Republicans and others have suggested the repeal of Title II of Dodd-Frank, which established an “orderly liquidation authority” under which the FDIC would be authorized to wind-down systemically important institutions, outside of the normal Bankruptcy Code process. Title II reflects the US’s implementation of the goal among regulators in major market jurisdictions of ensuring the orderly resolution of global systematically important financial institutions. While never used, this authority has been criticized as potentially putting taxpayers at risk of supporting “too big to fail” institutions, although that assessment is not universally shared. A related question would be whether amendments could be made to the Bankruptcy Code to facilitate bankruptcy proceedings involving large, systemically important institutions.

Bank regulators in major jurisdictions have required (or proposed to require) changes in derivatives documentation to take into account stays on close-out rights under Title II and other special resolution regimes. (In the US, the banking regulators have proposed but not yet adopted rules of this type.) Market participants have developed resolution stay protocols and other documentation changes to implement such regulations. Those rules may be reconsidered under the new administration, and, accordingly, the protocols and other implementing documentation may need to be delayed or reconsidered as well.

Trading Requirements. The regime for swap execution facilities, including both the regulatory requirements for such facilities and the mandatory use of such facilities for certain types of derivatives, has, in the view of many market participants, not been entirely successful. Concerns have been raised about market disruption, market fragmentation and onerous regulatory requirements, amid questions about whether the facilities achieve the goals of pre-trade transparency and greater liquidity. The new administration may seek to rethink aspects of these requirements.[3]
Regulation of Clearing Organizations and Financial Market Infrastructure. The regulation of clearing organizations and other financial market infrastructure has been the focus of significant attention recently in the US and abroad, in light of the requirements to clear many derivatives and concerns about concentration of risk in clearing organizations. Particular focus has been on resolution, recovery and wind-down of such institutions. It is possible the new administration will take different views on some of these issues, perhaps as part of broader consideration of “too-big-to-fail” financial institutions more generally. Although the topic has been less widely discussed, some in Congress have suggested that the Dodd-Frank authority under Title VIII for the enhanced supervision of financial market infrastructures (including clearing organizations and payment systems), as well as the access of such entities to certain Federal Reserve services, could also be reconsidered.
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The financial crisis was primarily caused by deregulation in the financial industry. That permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgages to support the profitable sale of these derivatives. ... That created the financial crisis that led to the Great Recession.

Cog wrote:CDS works like this. Let's say Newfie buys a corporate bond in Apple with a return of 6%. But Newfie is nervous that Apple can't pay that 6% or even worse defaults completely on paying back Newfie principal. Cog says for a small monthly payment I will make you whole if Apple defaults. That is all well and good up to point that Apple does default and Cog doesn't really have the money to make Newfie good.