Das's Dazzling Derivatives
Satyajit Das adds an interesting contribution the debate on OTC derivatives and the drive towards CCP in his article in the FT today (see earlier post for background). The opening paragraph sets the tone:
'US and European Union proposals for over-the-counter derivative regulations are consistent with H.L. Mencken's proposition that "there is always a well-known solution to every human problem - neat, plausible and wrong".'
Main points from the article:
- A single CCP would certainly qualify for "too big to fail"
- The success of CCP depends on collateral and collateral valuations may underestimate risk and value since these are usually based on historical volatility
- Cross-margining exposes the CCP to correlation risks in offset methodologies
- CCP depends on valuing contracts that depend upon liquid markets
- CCP margining requirements may communicate market stress to more participants and in turn create more stress
- Regulators are missing the point with CCP and should look addressing the core issue of innovation and complexity hiding excessive profits in derivatives
As a related aside, probably also worth taking a look at the following article on the return of securitisation.