Treasury's Plan To Spur Structured Product Innovation

Author:
Publish date:

It looks like the Treasury wants to throw down with the bespoke derivatives clan. Riding the wave of structured product tar and feathering, the Treasury believes it has found the solution to curbing the issuance of customized derivatives- which would naturally make the world a better place.

Through higher capital requirements and higher margin requirements for non-standardised derivatives, the legislation will encourage substantially greater use of standardised derivatives and thereby will facilitate substantial migration of OTC derivatives onto central clearing houses and exchanges," says the Treasury

Before they start lighting up the Cohibas and patting themselves on the back for a job well done, the masterminds behind the plan to increase the cost of doing bespoke business may want to reconsider what they've done. Faced with mounting pressure to become profitable without reducing headcount by 50% every 3 months, banks are now being told that if they still want to make large chunks of change on bespoke transactions, they better come up with clever ways to circumvent new capital and margin requirements. The Treasury can thank themselves for the next evolutionary step in structured products antics.
Move to curb non-standard OTCs [FT]

Related

Today In Swiss Banks With Creepy But Defensible Structured Products

I don't really understand it but the TVIX thing is creepy fun. If you haven't followed it, Credit Suisse issued this exchange-traded note called TVIX that was a 2x levered bet on the VIX. They suspended new issuance about a month ago due to position limits, and people were just so damn excited to own the thing that its price crept up to 189% of its fair value, where "fair value" is a reasonably easily measurable thing based on the formula in the TVIX prospectus. Then last week Credit Suisse announced that they would be creating more units, and the price plummeted to and then through fair value, which is what you'd expect to happen. Except that it started plummeting a few hours before that announcement, which is Suspicious. So of course people are sad and so there's a Bloomberg Brief with sort of sad-funny quotes like: “When it started to fall, I bought more because I couldn’t believe how low it was going. I didn’t realize I was playing with a hand grenade.” – Michael Gamble [heh! - ed.], 67, who doubled down on his TVIX investment before the price collapsed. Investors “all think: ‘Oh, I’ll just buy these things, I’ll be hedged against volatility and everything will be wonderful.’ And now they’ve seen the market goes down and their volatility protection goes down too, and they’re going ‘Hmm, what happened here?’ These people are going to have to pay a really expensive lesson.” – Larry McMillan, who manages $30 million as president of McMillan Analysis Corp. So, yes, Larry, they are going to pay a really expensive lesson. But what is it? Stephen Lubben has a little thing in DealBook today where he frets: