Do you know what I like about the futures
community? Its conservatism. No, not politically. When it comes
to risk. Yes, the industry that gave us "speculators" (a dim
bulb in a former Congress called them "grain gamblers") fears
default more than many people. Here is an example.
Reportedly, the Federal Reserve and the
Office of the Comptroller of the Currency have decided NOT to
impose mandatory margin (collateral) requirements on uncleared,
over-the-counter (OTC) derivatives transactions when commercial
"end users" are parties to them.
A concerted, multi-industry effort
favouring this outcome has prevailed, apparently leaving the
decisions about margin to the relevant counterparties.
As I suspect that the lobbying strategy
included complaints about the costs associated with margining,
I would expect those decisions will usually mean little or no
collateral deposits on many if not most transactions, elevating
the credit risk of both parties - not the outcome envisaged by
the Dodd-Frank Act.
Here, as with many of the assumptions of
that statute, OTC derivatives are considered to be "different"
from traditional, long-regulated futures and options markets
even though OTC derivatives serve many of the same purposes and
are often used interchangeably with their regulated
Now, consider the latter. Throughout my
lifetime, commercial end users have been required to post
margin (set and enforced by the exchanges' clearinghouses) for
both speculative and hedging transactions.
Hedge margins may be a bit lower (the
asset being hedged should appreciate in value as the hedge
itself suffers losses, offsetting some of the credit risk) but
margin deposits are required nonetheless. And these trades are
further guaranteed by multi-billion dollar clearing houses just
Is this not what Dodd-Frank sought to
emulate? Evidently not. As a promotion by Coca Cola might say,
there will always be plenty of bubbles.