The G20 Leaders Summit, takes place September 5th & 6th, 2013 in St. Petersburg, Russia. The climate is sure to be chilly with the Snowden fallout. The stench of chemical weapon use in Syria will taint the air. What can Obama and Putin make small talk about that won't have world shattering consequences? Maybe they can make a bet regulating derivatives? Just a little wager to make it interesting, say $630,000,000,000,000.
It was a bit tough to just find any mention of the fact they were going to be together next week and digging up an agenda isn't easy either. But I really got interested when I came across this little gem "Regulators agree on global swap rules ahead of G20 summit."
While seemingly abstract, minute details in the hundreds of pages of new regulation written after the crisis can have a life-changing impact on banks such as JP Morgan Chase & Co (JPM.N), Bank of America Corp (BAC.N) or Citigroup Inc (C.N).
Global financial meltdown was on our doorstep in 2008 and we threw it a trillion and hoped it would go away. But the pesky thing is still hanging around. Who can feel safe in their home when a $630 trillion derivatives market is getting away with whatever it wants? Unfortunately this is not a beast that will be easy to command. Somebody brave needs to stand in front of it with a whip and a chair and hope it acts nice and tame.
Some of the things touched on in the Reuters article referenced above are probably more critical to our global future than spy secrets or war crimes and they should get the attention they deserve. But the information is sketchy and somewhat obscure.
There could be an exception from the equivalence principle if a jurisdiction imposed requirements on trading that did not exist in the other jurisdiction, the regulators said.
In that case, the market parties would still have to comply with the requirements even if the rules in the two jurisdictions were comparable, the report said.
The same was true for clearing - the process where buyers and sellers send their orders through clearing houses, which function as traffic control centers.
In order for regulations to work they really need to be applied equally across all jurisdictions or you just get the situation where all the transactions take place in the Cayman Islands or some such entity claiming national sovereignty gives them the right to get away with anything they want. I am not sure what exceptions to the equivalence principal mean in this case. I am pretty sure though that the whole thing boils down to one thing that will make or break the world economy. Can derivative trades be taxed? That is where the above mentioned clearing houses would be critical and trades need to be treated equivalently no matter which jurisdiction they originate from.
It is a risky bet. If derivatives are left uncontrolled we may not be able to bail out the next counter-party SWAP company left holding the bag like AIG was in 2008. But if the whole thing is really a house of cards then it will probably collapse under the pressure of something as small as a 1 hundredth of 1% tax on SWAP transactions. Which side of that $630,000,000,000,000 bet do you want to take?