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Hi OJ, Thanks for the article, and it touched upon an area that could be problematic. An ogranization may not hold a "CDS" contract unless it also holds the bonds related to the "CDS" contract. I don't have a problem with this aspect, as it may take some of the faulty trading scenario out of an equation(s) used to measure a form of risk associated with and to a particular country or bond issue. But, a potential problem may arise with the fact that some of those who choose to no longer participate in the purchase of the bonds, issued by a country, will cause pressures upon higher yields that will be demanded in order to actually hold a given bond issue. The summary would be; "if I can't use a "CDS" contract to offset market risk, I will force you (the country) to pay a higher yield for the bond issues." Will this leave only the Euro Central Bank and all of the other semi-official branches they have and are forming to be the buyers of last resort for sovereign bond issues? Probably, and not unlike some of the current game plan. Two things come to mind with this new law. What will yield rates become, tied in with actual demand to purchase country issued bonds; and what other tools will traders use as a "work around" the new law/rule? Available alternative tools will have an affect upon some mutual funds used by "us". Lastly, a similar rule should apply to some commodity speculation. Examples would be that only an indivdual (farmer), a company which uses a product (corn) or another organization or country that is actually in need of the product (corn) would be allowed to use the futures markets to trade corn. A sample of a problem when everyone and his brother may use futures contracts for benefit of only attempting to make money for the "house" would be the reported largest holder of crude and related energy futures contracts in the early months of 2008 being Goldman-Sachs. I doubt if they are using crude oil to power their servers or back up generators. I recall one U.S. airline company in 2011 buying a refinery in the Philly area to have direct access to one end product for their use and having some pricing controls inhouse; being JP-4 fuel. Oh, well. I may be off base with these thoughts, so y'all may rip me a new one if needed, to help enlighten my too early in the day ramble.
Comments
Thanks for the article, and it touched upon an area that could be problematic.
An ogranization may not hold a "CDS" contract unless it also holds the bonds related to the "CDS" contract. I don't have a problem with this aspect, as it may take some of the faulty trading scenario out of an equation(s) used to measure a form of risk associated with and to a particular country or bond issue.
But, a potential problem may arise with the fact that some of those who choose to no longer participate in the purchase of the bonds, issued by a country, will cause pressures upon higher yields that will be demanded in order to actually hold a given bond issue.
The summary would be; "if I can't use a "CDS" contract to offset market risk, I will force you (the country) to pay a higher yield for the bond issues." Will this leave only the Euro Central Bank and all of the other semi-official branches they have and are forming to be the buyers of last resort for sovereign bond issues? Probably, and not unlike some of the current game plan.
Two things come to mind with this new law. What will yield rates become, tied in with actual demand to purchase country issued bonds; and what other tools will traders use as a "work around" the new law/rule? Available alternative tools will have an affect upon some mutual funds used by "us".
Lastly, a similar rule should apply to some commodity speculation. Examples would be that only an indivdual (farmer), a company which uses a product (corn) or another organization or country that is actually in need of the product (corn) would be allowed to use the futures markets to trade corn. A sample of a problem when everyone and his brother may use futures contracts for benefit of only attempting to make money for the "house" would be the reported largest holder of crude and related energy futures contracts in the early months of 2008 being Goldman-Sachs. I doubt if they are using crude oil to power their servers or back up generators. I recall one U.S. airline company in 2011 buying a refinery in the Philly area to have direct access to one end product for their use and having some pricing controls inhouse; being JP-4 fuel.
Oh, well. I may be off base with these thoughts, so y'all may rip me a new one if needed, to help enlighten my too early in the day ramble.
Take care of you and yours,
Catch