Thursday, January 29, 2009

The Debts of the Spenders: It's the Clearinghouse Stupid!

Consolidation is happening in the OTC derivative markets for CDS products.

WATCH THE EUROPEAN FRONT. Eurex and Clearstream are working on ways to handle the EU crisis (and it is a crisis by any stretch of the imagination).

In America we have the SWIFT standard soon to be integrated w/the Chicago traders - CME/CBOT (they merged) handling the products.

Remember when traders were asking if the LEH and FRE/FNM trades had settled last November? Well, they did successfully.

THEORETICALLY, these trades cancel each other out so we don't have the LEH problem from last fall. So, if AIG has $50 billion liability and Deutsche Bank has $50 billion trades they are supposed to cancel each other out. Central banks act as the guarantor of risk w/taxpayers as the ultimate guarantors.

The important thing in having a central clearinghouse instead of OTC derivatives is that there will no longer be counter party uncertainty. Therefore I do NOT think ETFs are going away anytime soon. Quite the opposite in fact.

Short ETFs are another story as their future looks uncertain from the relative lack of volatility going forward. Constant leverage will eat into them. On the other hand the bullish ETFs should fare well.The futures casinos (err... I mean exchanges) have been itching for a chance to get the big money. This is a 0 sum game where financiers are poaching each other's business.

After last fall's debacle, politicians and regulators are ready and willing to listen to the CME and Clearstream lobbyists.