Derivative Regulation

mbafwi · **Posted:** Wed May 13, 2009 2:26 pm

http://news.yahoo.com/s/ap/20090513/ap_ ... regulation

"Under Treasury's new plan, companies like AIG would have to prove they have enough reserve capital to support its sale of the derivatives."

That's a novel concept...

jb32, thoughts?

Raabend · **Posted:** Wed May 13, 2009 2:33 pm

Uh-oh. Here we go again.....

mbafwi wrote:

jb32, thoughts?

unhedged · **Posted:** Wed May 13, 2009 8:32 pm

Isn't this similar to what FAS157 already requires, except assuming default probability is 100%? Companies already complain about credit reserves at the levels they are now, and this is just going to tie up even more capital. I don't get how this is practical.

snipertrader · **Posted:** Fri May 15, 2009 4:30 pm

No,

FAS 157 deals with defining fair value and establishing a framework for measuring fv.
Credit reserves (provisions) are created if the entity FV is lower than carrying value. I am keeping it very generic here.

What this article talks bout is - having reserve capital (to start off with) to issue/create OTC derivatives. Ppl in AIG and their likes, issued tons of CDS's with no capital backing hoping that none of it would get triggered. Of course, we all know what happend to them now!

unhedged wrote:

Isn't this similar to what FAS157 already requires, except assuming default probability is 100%? Companies already complain about credit reserves at the levels they are now, and this is just going to tie up even more capital. I don't get how this is practical.

unhedged · **Posted:** Fri May 15, 2009 8:06 pm

Ah thanks, I was thinking of it in terms of exit price. You're right, FAS 157 is mostly about defining how to come to fmv, I just have come across it in context of the credit reserves.

snipertrader · **Posted:** Fri May 15, 2009 9:10 pm

If you wana go into provisions for reserves and all that good stuff, you need to look into FAS 114 - Accounting by Creditors for Impairment of a Loan

unhedged wrote:

Ah thanks, I was thinking of it in terms of exit price. You're right, FAS 157 is mostly about defining how to come to fmv, I just have come across it in context of the credit reserves.

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Derivative Regulation

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