4 ms·

If some of those counter parties go chapter 11, the resulting black hole will cause some tidal waves as it pulls the dominoes.

danielmarkbruce 4y ago
Yep, that's the derivatives market. And the insurance market. And many other markets where transactions are set up and then play out over time. It is what it is.
- thfuran 4y ago
  But is it what it should be?
  - danielmarkbruce 4y ago
    It's all that it can be.
  - vkou 4y ago
    If we're going to pick finance apart into 'Socially useful' and 'Socially damaging' parts, I think insurance would generally fall towards the left side of that spectrum. It's possible that our particular implementation of the insurance markets is deeply flawed, but a general concept of 'Pay X now to be backstopped in the event of catastrophe' is incredibly useful.
    - p1necone 4y ago
      Insurance is incredibly useful, absolutely. And should definitely exist. I also think that a lot of people pay for insurance that doesn't make a whole lot of sense though. If you could afford to replace the thing you're insuring out of pocket, you probably shouldn't be insuring it. I only pay for third party car insurance because I can just buy a new car if I total it, but I can't buy a new Lamborghini for the person I crashed into. I don't pay for contents insurance at all because I can buy a new bed and laptop if my house catches fire. Insurance companies have done the math, your EV for insurance is always going to be negative (on average), you should only insure against costs that you can't afford to pay in one big lump sum if they happen. Insurance is effectively a loan for things you already own, just put that money in a savings account instead.
- naveen99 4y ago
  Which book are the transactions recorded in, and how many books are there ? Maybe some Enron accountants can come out of retirement or get early parole to help ? It’s the pension fund take on overpromise and adultery.
  - danielmarkbruce 4y ago
    There isn't magic here. Your transactions are presumably recorded in your books and that of your counterparty. There are billions of books... This is misunderstanding BIS's point. The BIS is talking about the size of the market - ie they are concerned about liquidity and system wide risk. They are not saying the pension funds are short trillions via FX swaps.
    - naveen99 4y ago
      I mean “off”-balance sheets. Is there an “on”-balanc sheet ? Are there other $adjective-balance sheets ? maybe accounting standards should be updated to record derivatives risk to take into account interest rate and counterparty risk.
      - thfuran 4y ago
        I'll tell you what goes on between the balance sheets when you're older.
      - danielmarkbruce 4y ago
        In this thread I give an example of the Australian Future Fund and Coke bonds. It shows what is meant by off balance sheet. It's a matter of netting things v not, it's not a matter of just leaving things out.
      - kasey_junk 4y ago
        Off balance sheet is a term of art in this space that means it’s not listed as an asset or liability for the purposes of say fx exposure. The reason for this is that fx swaps dont create exposure to fx or credit swings the way that fx trading or borrowing against future cash flows do because they are fixed rate contracts. There is counterparty risk but a) that is typically mitigated much more cheaply and us generally less risky and b) you’d move the loss “on book” if the counterparty risk shapes up.
- CurrentBias 4y ago
  Lol. Lmao
- travisluis 4y ago
  > And the insurance market. No. Insurance is subject to the "insurable interest" doctrine, which generally prohibits using insurance as naked speculation. There are also far more backstops, reserve requirements, government guarantees, etc., designed to prevent this kind of implosion. Not saying it doesn't happen, but we've had since the South Sea Bubble to learn how to regulate insurance to prevent this kind of thing. The key difference is that insurance is generally regulated from a consumer protection perspective, since many insurance lines are sold directly to unsophisticated consumers. CDSs are, by contrast, sold primarily these days to sophisticated financial speculators, who are presumably fully aware of the kinds of risk involved.
  - bombcar 4y ago
    Even with insurable interest you can have an insurance company wiped out by fraud, mistakes, or (most likely perhaps) a mass event that causes claims at the same time. This is why flood and earthquake insurance often end up being (underfunded) and run by the state.
  - danielmarkbruce 4y ago
    And yet insurance companies go belly up. Google "failed insurance companies". Remember just 15 years ago? MBIA, Ambac, AIG? Regulation doesn't get rid of the risk. And it's got zero to do with naked speculation. We simply cannot make risk disappear. Contracting with someone else to eat the risk creates a new risk. Counter party risk just doesn't go away, despite our hopes and dreams.
  - dh2022 4y ago
    Huh? People use Credit Default Swaps (CDSs) for decades to speculate on debt defaults... "South Sea Bubble to learn how to regulate insurance to prevent this kind of thing." - AIG (at the time the biggest insurance company in the US) went down in 2008 during the Great Financial Crisis because they insured sub-prime loans (CDS again).. So I guess there are lots of holes regulators still need to learn....
    - occamrazor 4y ago
- temp_account_32 4y ago
  They don't think it be like it is, but it do
- JumpCrisscross 4y ago
  > that's the derivatives market These are run through clearinghouses in most money centre jurisdictions.
  - totalZero 4y ago
    Sometimes. Yet you can find a substantial over-the-counter segment of the derivatives business in most major financial markets.
fnordpiglet 4y ago
Counter parties go bankrupt all the time. Usually you’re faced with not receiving floating or not paying floating, and loss of your upfront fees for the contract. This isn’t a huge blow usually. Sometimes swaps blow up a counter party and you can’t get a windfall because they can’t pay it, but this isn’t a material loss but an opportunity loss.

danielmarkbruce 4y ago

Yep, that's the derivatives market. And the insurance market. And many other markets where transactions are set up and then play out over time. It is what it is.

thfuran 4y ago
But is it what it should be?
- danielmarkbruce 4y ago
  It's all that it can be.
- vkou 4y ago
  If we're going to pick finance apart into 'Socially useful' and 'Socially damaging' parts, I think insurance would generally fall towards the left side of that spectrum. It's possible that our particular implementation of the insurance markets is deeply flawed, but a general concept of 'Pay X now to be backstopped in the event of catastrophe' is incredibly useful.
  - p1necone 4y ago
    Insurance is incredibly useful, absolutely. And should definitely exist. I also think that a lot of people pay for insurance that doesn't make a whole lot of sense though. If you could afford to replace the thing you're insuring out of pocket, you probably shouldn't be insuring it. I only pay for third party car insurance because I can just buy a new car if I total it, but I can't buy a new Lamborghini for the person I crashed into. I don't pay for contents insurance at all because I can buy a new bed and laptop if my house catches fire. Insurance companies have done the math, your EV for insurance is always going to be negative (on average), you should only insure against costs that you can't afford to pay in one big lump sum if they happen. Insurance is effectively a loan for things you already own, just put that money in a savings account instead.
naveen99 4y ago
Which book are the transactions recorded in, and how many books are there ? Maybe some Enron accountants can come out of retirement or get early parole to help ? It’s the pension fund take on overpromise and adultery.
- danielmarkbruce 4y ago
  There isn't magic here. Your transactions are presumably recorded in your books and that of your counterparty. There are billions of books... This is misunderstanding BIS's point. The BIS is talking about the size of the market - ie they are concerned about liquidity and system wide risk. They are not saying the pension funds are short trillions via FX swaps.
  - naveen99 4y ago
    I mean “off”-balance sheets. Is there an “on”-balanc sheet ? Are there other $adjective-balance sheets ? maybe accounting standards should be updated to record derivatives risk to take into account interest rate and counterparty risk.
    - thfuran 4y ago
      I'll tell you what goes on between the balance sheets when you're older.
    - danielmarkbruce 4y ago
      In this thread I give an example of the Australian Future Fund and Coke bonds. It shows what is meant by off balance sheet. It's a matter of netting things v not, it's not a matter of just leaving things out.
    - kasey_junk 4y ago
      Off balance sheet is a term of art in this space that means it’s not listed as an asset or liability for the purposes of say fx exposure. The reason for this is that fx swaps dont create exposure to fx or credit swings the way that fx trading or borrowing against future cash flows do because they are fixed rate contracts. There is counterparty risk but a) that is typically mitigated much more cheaply and us generally less risky and b) you’d move the loss “on book” if the counterparty risk shapes up.
CurrentBias 4y ago
Lol. Lmao
travisluis 4y ago
> And the insurance market. No. Insurance is subject to the "insurable interest" doctrine, which generally prohibits using insurance as naked speculation. There are also far more backstops, reserve requirements, government guarantees, etc., designed to prevent this kind of implosion. Not saying it doesn't happen, but we've had since the South Sea Bubble to learn how to regulate insurance to prevent this kind of thing. The key difference is that insurance is generally regulated from a consumer protection perspective, since many insurance lines are sold directly to unsophisticated consumers. CDSs are, by contrast, sold primarily these days to sophisticated financial speculators, who are presumably fully aware of the kinds of risk involved.
- bombcar 4y ago
  Even with insurable interest you can have an insurance company wiped out by fraud, mistakes, or (most likely perhaps) a mass event that causes claims at the same time. This is why flood and earthquake insurance often end up being (underfunded) and run by the state.
- danielmarkbruce 4y ago
  And yet insurance companies go belly up. Google "failed insurance companies". Remember just 15 years ago? MBIA, Ambac, AIG? Regulation doesn't get rid of the risk. And it's got zero to do with naked speculation. We simply cannot make risk disappear. Contracting with someone else to eat the risk creates a new risk. Counter party risk just doesn't go away, despite our hopes and dreams.
- dh2022 4y ago
  Huh? People use Credit Default Swaps (CDSs) for decades to speculate on debt defaults... "South Sea Bubble to learn how to regulate insurance to prevent this kind of thing." - AIG (at the time the biggest insurance company in the US) went down in 2008 during the Great Financial Crisis because they insured sub-prime loans (CDS again).. So I guess there are lots of holes regulators still need to learn....
  - occamrazor 4y ago
temp_account_32 4y ago
They don't think it be like it is, but it do
JumpCrisscross 4y ago
> that's the derivatives market These are run through clearinghouses in most money centre jurisdictions.
- totalZero 4y ago
  Sometimes. Yet you can find a substantial over-the-counter segment of the derivatives business in most major financial markets.

fnordpiglet 4y ago

Counter parties go bankrupt all the time. Usually you’re faced with not receiving floating or not paying floating, and loss of your upfront fees for the contract. This isn’t a huge blow usually. Sometimes swaps blow up a counter party and you can’t get a windfall because they can’t pay it, but this isn’t a material loss but an opportunity loss.