Johnson: A safer world?

Johnson: A safer world?

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 brethren.

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 in case.

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.