PBS Frontline Video: “The Warning”. You can google for the video. What was the e
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Question
PBS Frontline Video: “The Warning”. You can google for the video.
What was the ethical culture of the derivatives market prior to 2008? Were there any standards of conduct, rules of operation or record keeping of transactions?
Who attempted to address the problem in the derivatives market, and why was her effort ignored as “potentially disruptive regulation?”
What were the politics by which the big three--who were they--made decisions that led to a cluster of errors by the government?
Have any government officials been held accountable or disciplined for their responsibility for the financial collapse?
Explanation / Answer
1.Ethical Culture of the derivatives market prior to 2008- Derivatives are defined as Financial contract which includes shares, bonds, equities, commodities etc. Mutual funds are come in this definition, it is a security or a type of financial instrument which invest in other securities.financial instrument can be based on two products whether physical or financial. Basically this market started as exchange based linked to geographical market. This helps led to deeding of liquidity and flexibility in the relevant markets. Almost all banks deals in derivatives. This gives option to be more specialized to tend and desire to regulators to ensure that they are properly used.
There are three categories of derivative users-
a.Producers- Almost all international and national traded commodities have future contracts, Thus they tend to use derivatives markets. This hedge the price risk of traders. Basically producers are the most important part of the commodity but they are not the controlling parts.
b.consumers-Consumers are the shadows of the producers in the market.Sometimes they can e issuers and investors in the securities.
c.Intermeditaries- Generally they are banks sometimes brokers and sometimes speculative traders.They provide Upton 90% of volume in any market. Their activity provides essential liquidity in the market but also increases volume.
Standard of conduct,Rules of operations and record keeping transactions-
As we know that no market is morally neutral. It express and needs moral terms at the same time. It is true that ethical disclosure is essential in financial terms of market. But in business it is more and more narrowly defined. Transparency is the most important tool of the financial markets. It is the management tool to understand the risk tool in any market. A company enters in loans with any bank in multi currency or in any option in fully revolving form.
2.Probelms in the derivatives markets- As we know that risk factor is always included in the liquidity market. Problems usually comes in the derivative markets are risk allocation, market manipulation, credit contraction.Trades usually occur in the presence of third party instead of direct trades between buyer and seller. Exchange trading require a large market with frequent traders.Improperv reporting may lead to wrong notion about the market conditions. Contract design is also a major problem in making contract. These contract designs are adopted to ensure that the terms and conditions are meeting benchmarks. The object of making these standards are to ensure that contacts are not readily susceptible to manipulation.
3.Politics of Derivatives markets- Derivative market has begun with the political outcomes. With the global market of building the derivative market have grown very rapidly in the recent decades, the need of the market is to reform the financial crisis system. To make this system effective policies which have been introduced are
By supporting these national efforts and policies system can be make for efficient, international standard bodies can be reviewed in relation to financial markets.
4.Government contribution towards the responsibility for the financial collapse-The finance crisis revealed a number of shortcomings in their policies and their practices at its regulatory system, financial system and supervisory agencies. The main agenda is to strike the right balance between the risk allocation and risk taking in the development of growth.
Steps taken by the government are
a. Setting up the regulating standards
b.crisis management and regulations
c.Reforms of derivative markets
Finally new trading conventions have been developed which requires years of experiments and support of participants in the market to continue with the derivative markets. The erosible feature of derivative market is many people making and creating derivatives market on policies issued by the government.
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