Hi Ron,

I am grateful that you that you agree with my suggestions and I must apologise as I believe my criticism may have been too harsh.

I definitely agree with the notion that derivatives markets left to their own devices may be destabilising and a possible threat to systemic stability. The main reason I feel is counterparty risk because with many complex, over-the-counter instruments institutions often "offset" their risk so many times that at the end one may be very uncertain of the actual identity of the counter party and whether that institution is solvent enough to honour its obligations. A great example of that risk was credit default swaps and AIG who appeared to be the “insurer” in the majority of the transactions. Derivatives are inherently leveraged instruments which further complicates matters and makes the situation potentially explosive.

So naturally I agree with your argument that regulators and financial instructions need to be aware of the pitfalls and thread carefully.

However, as I have mentioned previously, using ridiculous and meaningless (art least in the absolute sense) numbers like $700 trillion (unfortunately the only available measure of the derivative market, I concede) may load the dice in one’s favour and add unnecessary credibility or importance to one’s argument. Regulation of derivatives market is no more important than for example addressing the issues of government and household indebtedness but when one quotes that the derivatives market is as large as $700 trillion it may erroneously appear that other issues fail in comparison.

The notional value of derivatives metric is abused and misused in so many arguments, that I feel it is probably best not to put unnecessary attention on it especially if one’s argument is strong and valid enough without it.

All the best,
Valeri