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View Diary: Hope And Cave: SEC and CFTC Fold on Regulating "Financial Weapons Of Mass Destruction" (145 comments)

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  •  The problem (4+ / 0-)
    Recommended by:
    ChiTownDenny, elwior, averybird, Argyrios

    is that when you divorce the instrument from the underlying asset, your ability to create leverage explodes.  And that leverage can  cause wild swings in process.

    The bitter truth of deep inequality has been disguised by an era of cheap imported goods and the anyone-can-make-it celebrity myth - Polly Toynbee

    by fladem on Fri Apr 20, 2012 at 12:49:07 PM PDT

    [ Parent ]

    •  You're hitting the nail on the head! (0+ / 0-)

      Yes, connecting the underlying asset to the instrument is part of what it means to be a hedge. Courts have held that way in cases like Corn Products Refining v. Commissioner.

      That was my point, that "hedge" is not a meaningless word that speculators can use to avoid regulation, but rather denotes a distinction with real underlying significance.

      I was responding to the diarist's statement that  

      Firms can rename their swap trades to bypass regulation.
      I was saying it isn't that simple, and I think you're saying the same thing. There should be regulations that exempt hedges, properly understood.

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