Margin Requirements Quotes

AIG’s failure was possible because of the sweeping deregulation of over-the-counter (OTC) derivatives, including credit default swaps, which effectively eliminated federal and state regulation of these products, including capital and margin requirements that would have lessened the likelihood of AIG’s failure. The OTC derivatives market’s lack of transparency and of effective price discovery exacerbated the collateral disputes of AIG and Goldman Sachs and similar disputes between other derivatives counterparties. AIG engaged in regulatory arbitrage by setting up a major business in this unregulated product, locating much of the business in London, and selecting a weak federal regulator, the Office of Thrift Supervision (OTS).

What I think about derivatives is if every institution that owns or trades them is properly margined and marked to market, including end-users, including every institution, including sovereigns and multilateral institutions, then the system would be safe - if people were margined the way customers of investment banks are margined.

In an extreme credit crunch, leveraged purchases of gold cause forced sales, because any price correction triggers margin calls. As a result, gold can be very volatile - upward and downward - at the peak of a crisis.

Any investment bought via credit always runs the risk of margin calls and, eventually, liquidation.

While the move to central clearing has made the system safer, we need to make sure that the central counterparties have the resources and risk-management practices to withstand plausible but severe shocks.

The good thing about a dealer's derivatives portfolio is that it is marked to market.

There is a bit of a problem with the match between derivative securities markets and the primary markets. We have long ago instituted principles, essentially high margin requirements, to prevent certain instabilities in the stock market, and I think they're basically correct. The trouble is that there's a linkage, let's say, between something like the stock market and the index futures markets, and the fact that the margin requirements are very different, for example, played some role in the October '87 crash.

Derivatives trading should be standardized and as much as possible moved to clearinghouses.