Banks have proven time and time again that they can't control derivatives trading, says the ABC's financial presenter Alan Kohler.
Almost all financial derivatives trading adds nothing but risk to the world and should be banned.
It won't be, but that doesn't mean the debate is academic.
Regulators are attempting to bring derivatives into the light through mandatory exchange execution and clearing and "Legal Entity Identification" rules, but progress is slow and fragile.
It can be filed under "B" for believe it when we see it.
But is there any reason to allow financial derivatives at all?
New York hedge fund manager James Rickards says they should simply be banned because the benefits are illusory and the https://healthcareinsuranceplan.info/gambling/gambling-and-taxes-tips.html is that risk is created out of thin air and then multiplied.
That's what happened in 2008, and, says Rickards, the problem is worse now: The derivatives books are larger.
If we had a problem then, we have a bigger problem now.
This will collapse again if we don't do something about it.
Most derivatives trading involves swaps or contracts for difference, where two people bet on movements in an underlying asset or income flow without actually trading in it.
It's a bit like betting is derivative trading gambling flies crawling up a wall, without having to buy the flies.
What's more, they are usually traded "over is derivative trading gambling counter", which means the deal is just put through by a broker and doesn't go through an exchange - what ASX CEO Elmer Funke Kupper would call "dark execution" as opposed to "lit".
Credit default swaps are bets on whether a country or company will go broke; interest rates swaps are bets on movements in interest rates; contracts for difference are bets on movements in a share price or other asset; and so on.
Futures contracts and options are derivatives as well, and there are a variety of derivatives based on home mortgages, although these have fallen into disuse after the GFC.
In fact, derivatives caused the 2008 global financial crisis because banks and investment banks vastly multiplied the leverage on their balance sheets by betting through derivatives and then losing control.
At the Cannes Summit last November, the G20 issued a communiqué that, "All standardized over-the-counter derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and centrally cleared, by the end of 2012.
Nevertheless, regulators are grinding their way is derivative trading gambling consultation and report production with a view to eventually dragging OTC derivatives trading into the open, where the players at least have to say who they are.
The US Dodd-Frank legislation, passed in 2010, requires non-US banks to register as swap dealers with US regulators from next year if they want to trade derivatives there.
Reuters reported last week that Asian banks are cutting their relationships with US banks so they don't have to register, and US banks themselves are restructuring so they can keep going.
Let's be clear: basically, we're talking about a casino where the gamblers are banks.
And banks aren't just any old punters: they also take deposits and lend money, underpinning the financial system on which society rests.
The losses of shirts don't always cause a general financial crisis, but there's always a wobble, and click the following article 2008, the combination is derivative trading gambling AIG, Merrill Lynch and Lehman Brothers and a few others did cause a global recession and is still causing widespread misery.
James Rickards says most of the arguments put forward in favour of financial derivatives are spurious.
The proportion of derivatives trading that involves a genuine business person - a farmer or a commodity buyer, for example - offloading their risk is tiny.
Most involve the creation of risk from thin air and gambling on it.
It's often argued that derivatives is derivative trading gambling allows more accurate price discovery, especially in the credit default swaps market.
Actually, there has always been accurate price discovery in the bond market.
But the main problem is that banks have shown time and time again that they can't control it.
Either there's a rogue trader who loses billions, or, as with sub-prime mortgage derivatives, the whole system gets out of control over time and then blows up.
If derivatives can't be banned, then perhaps banks should just be stopped from trading them and putting their capital at risk.
Oh, wait a minute, they used to be - it was called Glass-Steagall, but that was repealed.
Alan Kohler is Editor in Chief of Eureka Report and Business Is derivative trading gambling, where this article was first published, as well as host of Inside Business and finance presenter on ABC News.
View his full profile.
J. W. Verret: Are derivatives a form of gambling? 1-5-12
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