Archegos just a warning of things to come

Archegos just a warning of things to come, and it will be ignored! But how many Risk managers are preparing their business for a 1987-style market 'surprise', i.e. a near-instant 25%+ move in prices? Are the clearing houses, prime brokers, margin clerks really set up for this type of 'black swan' event? Markets are much bigger then in 1987 when bond issues of 1 billion were the rare exception and the derivatives market was in its infancy. And we don't even want to think of the break-up of the Euro (my suggestion - if you hold any Euros make sure you are not left 'naked' when it happens).

Super High Margins required on Bitcoin Futures

In my opinion the collateral required to back up futures trading - but also all over-the-counter derivatives trading - is way too low and not sufficient to withstand a market crash like the one in October 1987 or during the GFC (Great Financial Crisis).
2%, even 8% margin as suggested in this article are never going to be sufficient when markets move 10, 20 per cent of more within days.
The outcome can only be described as truly catastrophic, not only for market participants, but for society and the economy as a whole. It would drive a stake right through the heart of Capitalism.
Why Interactive Broker's Founder fears Bitcoin Futures (Barron's, Pay Wall)

More Swaps, more Risks

Glad to see that another swap market (Chinese Yuan) seems to be in rude health, but nearly all swaps are facilitated by a bank acting as counterparty - and are these risks not contrary to what current regulatory efforts want to achieve? If some regulators advocate a move to a leverage ratio of 10 where does that leave the gazillions of over-the-counter swaps?

Scariest Part of Gold Crash?

Reads a headline but the article forgets to mention what really should scare investors, market professionals and regulators: the fact that the price of a major asset can plunge by such a large amount in a few days demonstrates the inherent fragility of financial markets. During the past 30 years the unprecedented growth of  (mostly over-the-counter) derivatives - subject to 'light-touch' supervision - has created a huge house of cards of interconnections between all financial market participants that could rapidly spiral out of control. The absurd length of time required to unwind all the liabilities from the collapse of Lehman - and the number of company 'boxes' created by that firm - shows that the current regulatory scheme is not up to the job. Proper stress-testing of banks, insurance companies, securities firms, asset managers and pension schemes would have to be much tougher and assume a shift in asset prices by multiples of the underlying assumptions that are used today, something in the order of 20-25 percent.

Derivative Trading - prone to abuse, fraud

As little - or even no - cash changes hands when transactions in derivatives (especially those conducted " Over-the-Counter") are executed they require even more oversight than transactions in securities that are cash-settled within a very short time span. Malpractice can easily be hidden from compliance and audit departments - even if these are not complicit in any misconduct or fraud. Often staff in these units are of lower status, less well paid and less well versed in the intricacies of the instruments involved. OTC derivatives are by nature traded by appointment and the correct pricing is not easy to verify - even with the best intentions of any supervisors. So it is quite easy to build in a margin for those that want to skim some money off the transactions they conduct. That the dealing community fights every proposal to bring all transactions online and onto exchanges raises doubts about the sincerity of their motives in doing so. Reports about the conditions in the dealing department of Monte dei Paschi di Siena illustrate these problems poignantly. (Reuters)

Derivatives: Instruments of Mass Destruction?

Another day, another disclosure of a massive derivative loss. Given the astronomical amount of outstanding (OTC) derivative contracts (and even astronomers that are used to think in big numbers might have trouble relating to the relevant numbers) it is no wonder that these 'accidents' pop up on a regular basis. Low or non-existent capital requirements make these off-balance sheet exposures attractive for treasurers and CFO's. They require little or no cash up-front so give the somewhat false impression that entry to the great casino is free and profits will flow like manna from heaven. Sometimes they are sold as hedging instruments - and they might well be fit for the purpose but the iron discipline needed to stick to that narrow use is not given to all market participants. And many users are easy prey to the salespeople that are highly incentivised to peddle ever-more exotic schemes that resemble a 'heads I win, tails you lose' game. And given the fact that derivatives are ultimately a zero-sum game it is only natural that those offering these products are above all interested in making sure that they are not on the losing side of any derivative deal. Derivatives may well have a place in the arsenal of any financial market participant - but have to be supervised by experienced experts who can give an objective assessment of the risks and rewards involved.