[Quinny]

All bets are off then! Although it may seem insane crazy, I think it might be the only way out of the crazy position we're in!

$this->bbcode_second_pass_quote('MrBill', 'I')t is two separate issues:

Leverage and the size of the outstanding positions on one hand;

and the reference rates and how the contracts for differences are calculated on the other.

Although at the moment we are seeing one exacerbate the other as not only is the size of the outstanding positions enormous, but legal risk is adding to the uncertainty of the value of the contracts and who owes what to whom.

During the Russian crisis the Russian government just declared all NDF contracts null & void. Its interpretation was that contracts for differences is gambling and not enforceable. The practical implication was that NDF contracts outside of the Russia were also declared force majeure as there was no longer a published reference rate from the Russian currency exchange against which the outstanding contracts could be settled.

After every crisis we get better at tightening up the legal language, but as I said earlier they can never be 100% water tight and foresee every eventuality. Probably why early in this crisis we saw a flight to simplicity and saw players shunning anything complicated that was hard to price.

My greatest fear is that after this crisis that there will be a push to over-regulation that is also going to strangle legitimate hedging and risk mitigation, while driving up the cost for all sorts financial products. You may say, good, but it will hurt such products as ETFs that many individuals use as investment vehicles as well. The cost of everyday mortgages will certainly rise too as the ABS/MBS markets become a lot smaller and more sensitive to risk (i.e. less liquid).

[MrBill]

$this->bbcode_second_pass_quote('', 'A')ll bets are off then! Although it may seem insane crazy, I think it might be the only way out of the crazy position we're in!