5/15/2009

One government regulation that will make markets more volatile

Few seem to understand how speculation smoothes market swings. If you think that prices will rise, you make money by buying the asset now. If it falls, you lose money.

The WSJ has a discussion of the new regulations here.

Federal regulators outlined plans to regulate the giant market for derivatives, a move aimed at avoiding a repeat of the turmoil created last year by certain financial institutions whose risk-taking in exotic financial instruments went largely unchecked.

Under a proposed raft of reforms, regulators could be given authority to force many standard over-the-counter derivatives to be traded on regulated exchanges and electronic-trading platforms. That would make it easier to see prices and make markets more transparent.

Firms with large derivative exposures or that trade more-complex derivatives would be subject to new reporting requirements. The proposal also calls for all standardized derivatives to go through clearinghouses that will guarantee trades and help cushion the impact of a collapse of a large financial institution. . . . .

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