Derivatives “Stays†– The Next Step in Corralling Investor Funds
We previously discussed the debate over the introduction of new rules that would allow money market funds to stop withdrawals – see “Redemption Gates for Money Market Funds†for details. This debate followed on the heels of similar proposals being made for bond funds. These regulations aim to “forestall panics†by preventing investors from withdrawing their funds from wobbly looking entities in the event of another financial crisis.
We personally believe that there can hardly be a better argument for holding physical gold outside of the system, but apart from that such rules are obviously weakening property rights.
Now another set of similar regulation is about to be introduced, in this case concerning derivatives:
“The $700 trillion financial derivatives industry has agreed to a fundamental rule change from January to help regulators to wind down failed banks without destabilizing markets. The International Swaps and Derivatives Association (ISDA) and 18 major banks that dominate the market will now allow financial watchdogs to apply temporary stays to prevent a rush to close derivatives contracts if a bank runs into trouble, the ISDA said on Saturday.
A delay would give regulators time to ensure that critical parts of a bank, such as customer accounts, continue smoothly while the rest is wound down or sold off in an orderly way.
That would help to avoid the type of market chaos sparked by the collapse of Lehman Brothers in 2008 and also end the problem of banks being considered too big to fail.
The Financial Stability Board (FSB), a regulatory task force for the Group of 20 economies (G20), had asked the ISDA to make the changes with the aim of ending the too-big-to-fail scenario in which banks are propped up with taxpayer money to avoid market disruption.
Under the new contract terms, default clauses in derivatives contracts such as interest rate or credit default swaps would be suspended for a maximum of 48 hours.â€
