October 27, 2010 – 3:57 pm
In an earlier post, we took a first step in answering the question ‘Which system is more expensive to the end-user, one in which both parties can agree to an uncollateralized trade, or one in which collateral is required by virtue of the fact that all trades must be cleared?’ The first step took the [...]
October 25, 2010 – 3:48 pm
In earlier posts — here and here — we addressed the fallacy that dealers offer end-users uncollateralized derivative deals for which the dealers do not charge any fee for the credit risk they are accepting. This fallacy is at the heart of the horror stories circulating about the dangerous costs that OTC reform will impose [...]
October 15, 2010 – 8:51 pm
The April 2010 issue of the Journal of Finance carries an article providing a statistical analysis of how firms respond to cash flow shocks. The authors are Vladimir Gatchev, Todd Pulvino and Vefa Tarhan. It stands in a long line of empirical research attempting to nail down an answer to that question. The line is [...]
October 11, 2010 – 3:25 pm
During the debate leading up to passage of the Dodd-Frank bill a large number of end-users lobbied to shape the bill’s provisions concerning the OTC derivatives markets. One of the main objectives of their lobbying was inclusion of an exemption for end-users from the mandate that swaps be cleared. Clearing would require that end-users post [...]
October 7, 2010 – 3:17 pm
During the debate about financial reform, end-users were scared silly about the possibility that they might have to post collateral on their derivative positions. The horror stories that have been making the rounds are largely baseless. The common plot line in these tales runs something like this… (1) In the OTC market as it was [...]
October 6, 2010 – 2:38 pm
Risks usually come in a bundle. If you want exposure to a particular factor risk – or you want to hedge that particular risk and concentrate your exposure onto other factor risks – you may have to find a way to create that exposure synthetically. Investment managers are constantly looking for ways to do this. [...]
October 4, 2010 – 3:13 pm
Transparency is one of the objectives of the Dodd-Frank bill and the reform of OTC derivatives markets. End-users and the public at-large stand to gain the most from transparency. Dealers stand to lose as competition is intensified and profit margins are cut. There is an important precedent for this: the recent reform of trading in [...]
October 2, 2010 – 3:02 pm
The Dodd-Frank bill that was signed into law in July 2010 includes important reforms of the OTC derivatives markets. These markets cover a large portion of the financial instruments currently used for risk management at non-financial corporations. The reforms have the potential to make these markets function more effectively, potentially lowering the costs of hedging. [...]
