In these discussions I always like to quote from the standard textbooks of the field. For instance, to get anywhere near a job dealing with derivatives you have to convince people that you have read Hull's Options, Futures and Other Derivatives. I built a diary around an extended quotation from it called This Should Never Have Happened. There I quoted from the Lessons for Financial Institutions. But there are also Lessons for nonfinancial corporations:

• Make sure you fully understand the trades that you are doing
  
• Make sure a hedger does not become a speculator
  
• Be cautious about making the treasury department a profit centre
  

And lessons for all users of derivatives

• Define risk limits
  
• Take the Risk Limits Seriously
  
• Do not assume you can outguess the market
  
• Do not underestimate the benefits of diversification
  
• Carry out scenario analysis and stress tests
  

The issue is that if a competitor eschews all these sensible practices they can undercut you and drive you out of business the old-fashioned way before they go out of business in a bang of their derivative portfolio. So once one competitor starts flouting risk standards, the whole sector goes to the dogs, and normally it then becomes a question of who is better capitalised when the shit hits the fan.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith