Jim Sinclair of JSMineset has been ranting about these derivatives for some time now.
Sinclair writes, concerning over-the-counter (OTC) derivative contracts, that they are:
Without regulation.
The issuers and the individuals who trade them are regulated by the SEC and by voluntary associations like ISDA and the NASD which are in close contact with government regulators on a continuous basis.
Without listing on public exchanges.
I'm not sure why this is a problem. Options on equities were traded without a public exchange for years. Most corporate bonds - a product that has been traded liquidly for well over 150 years in this country - are not listed on public exchanges.
Without standards.
This is a complete lie. Everyone who trades these contracts comply with the standards of ISDA and other derivative trading associations. I'm unaware of any market players who are willing to do business with anyone who refuses to sign on to association standards.
Not in the least bit transparent.
Of course they are. Registered investment companies are requried by law to keep records of all such transactions.
Without an open market of the bid/ask type.
What other sort of market is there? Of course such markets exist. Thousands of OTC contracts trade every single day.
Dealt in by private treaty negotiations.
I have no idea what this even means. Financial transactions are always negotiations and usually private.
Without a clearing house.
There were no clearing houses for stocks, bonds or non-OTC derivatives for decades. Eventually there will probably be a brisk enough market for OTC derivatives to the point where a clearing house makes sense, but it is a developing market.
Unfunded without financial guarantee of any kind.
No standard derivative has a financial guarantee. Most corporate bonds have no financial guarantee. Shares of stocks have no financial guarantee. Mutual funds have no financial guarantee. This could be Sinclair's most idiotic statement yet.
Functioning as contracts of specific performance.
Ummm, what are "contracts" for? When I contract with a builder to finish my basement, I expect a specific performance - i.e., that the builder finish my basement! What is the point of a contract if the parties do not abide by its specific terms?
Of a character or ability to perform that is totally dependent on the balance sheet of the loser in the arrangement.
So? If I buy a share of stock hoping that it will go up and it goes down - I lose money. That's life. If I buy an OTC derivative and it expires out-of-the-money, I lose the premium I paid. Is Sinclair suggesting that individuals who enter into voluntary financial transactions should be guaranteed not to lose any money?
Evaluated by computer assumptions made by geeks, market-inexperienced mathematicians who assume religiously that all markets return to their normal relationships regardless of disruptions.
This is just ignorance wrapped in insults. OTC derivatives traders generally have deep market experience in various financial products and they do not all hold to a doctrinaire view of regression theory. just because Sinclair isn't good at math doesn't mean that people who are good at math don't know what they are doing.
Now in the credit and default category and are considered by accepted authorities as totaling more than $20 trillion in notional value.
That's probably a large exaggeration. And even if it were not, it would represent just a small fraction of the world financial markets.
Notional value becomes real value when the agreement is forced to find a real market for ending the obligation, which is how one sells it.
That it is the whole point of any financial obligation.
To put it kindly, this Sinclair guy has literally no clue what he is talking about.