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Credit Ripples Spread to Oil

by ChrisCook Wed Oct 1st, 2008 at 11:50:56 AM EST

There's an interesting Reuters analysis piece

Credit worries slow OTC oil trading

which illustrates that the credit ripples are spreading....

They said credit worries were also spurring a shift to clear over-the-counter oil trades, such as price swaps, on NYMEX Clearport, which offers clearing for some OTC derivatives.

"It's driving a lot of people toward doing cleared OTC business, we've seen that to quite a degree," said Christopher Bellew, a broker at Bache Commodities Limited.

On the face of it, that has to be a good thing in terms of regulatory risk and transparency to the regulators.

But as I have pointed out elsewhere, I don't think either market participants or regulators appreciate that clearing houses are as much a "single point of failure" as Fannie Mae and Freddie Mac are.

They have in common the fact that they both support a pyramid of price risk supported by a sliver of capital. As I have recently said - again - the risk of "Black Swan" events wiping out that capital is far higher than is generally appreciated

Oil markets: an accident waiting to happen

Moreover, the ongoing move by the Intercontinental Exchange to clear their own business

Ice Clear Europe

(and thereby make more money from what is known in the trade as a "vertical silo" approach) is temporarily on hold

Clearing transition postponed

during the current market turbulence.

No doubt the FSA is asking them very searching questions about their risk management.

But the bottom line is that the pool of capital supporting these transactions after the transition must - as far as I can see - be less than it is when the risk lies in London Clearing House's risk pool of capital which covers several other markets beyond oil.

Another classic case of the profit motive acting to increase systemic risk,

I'm not sure I understand what the Reuters story or you are suggesting. Are you saying there is an oil price bubble? So if money isn't found to prop up the prices, then the oil prices too will collapse... like real estate and tech stocks and ... before it.

Sorry, if this comes across as dumb. Your diary makes a wooshing sound as it roars over my head. I may be missing the point completely.

by Magnifico on Wed Oct 1st, 2008 at 02:57:07 PM EST

I believe that there was a "bubble" in the oil market - although Jerome prefers to call it "large volatility" - and that there will inevitably be one again the next time a wave of speculative money swills into the oil market.

The Reuters story is in respect of the way that traders are increasingly reluctant to deal with each other without a "risk intermediary" -aka a "Clearing House" acting as guarantor of the performance of the transaction.

So what is happening is that transactions which were "bilateral" or "over the counter" are now increasingly being guaranteed by clearing houses, as Reuters reports.

The conventional regulatory wisdom is that this is a "good thing".

I am not so sure, and regard it aa double-edged sword. I think that it concentrates risk into "single points of failure" which are only too prone to those "once in 10,000 year" events termed "Black Swans".

So that the next time there is a Bubble - and I believe that these are a feature, not a bug, of the system - the market is systemically very exposed.

So, in a nutshell, I see the report as confirming a potentially dangerous growing concentration of risk.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 1st, 2008 at 03:24:53 PM EST
[ Parent ]
Yes, I've read it about 3 times and I'm still none the wiser.

sorry chris.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Wed Oct 1st, 2008 at 03:49:19 PM EST
[ Parent ]
...but you are better informed... ;-)

My bad, actually, I think shorthand Diaries don't work other than for those who understand the shorthand.....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Oct 1st, 2008 at 03:53:07 PM EST
[ Parent ]
....and by the way, it didn't pass the Solveig Test either....until she read my reply to magnifico.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Oct 1st, 2008 at 03:56:30 PM EST
[ Parent ]
Me too. If you unpacked your shorthand a bit (hmm... quite a bit), people would stand a better chance of getting it. Especially Bears of Little Brain.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Oct 1st, 2008 at 04:35:31 PM EST
[ Parent ]
I agree.

It's always hard to deal with Chris' high level of abstraction.



She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Oct 1st, 2008 at 04:43:03 PM EST
[ Parent ]
That's rich, coming from a Colour Field painter ;-)

You can't be me, I'm taken
by Sven Triloqvist on Wed Oct 1st, 2008 at 04:46:56 PM EST
[ Parent ]
Don't you mean high level of subtraction....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Oct 1st, 2008 at 04:48:10 PM EST
[ Parent ]

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