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Comment for General CFTC CFTC and SEC Staff Public Roundtable on International Issues relating to Dodd-Frank Title VII

  • From: John W Gavin MD ret.

    Comment No: 48148
    Date: 9/6/2011

    Comment Text:

    There continues to be a massive amount of derivatives risk present in the global markets stemming from the problems in the credit markets that peaked in 2007 and caused the first correction in the markets that seems not yet to have completed.

    During 2010, reliable sources have quoted that global OTC derivatives risk has exceeded the $1 quadrillion level but recently this has been quoted by the BIS to be about $700 trillion, a substantial difference. Is this partially due to the changes in foreign exchange rates that may result in lower numbers when risk has not changed? Is it due to ignoring certain changes in asset values? Is a proper accounting being done for these important measurements?

    A problem that I believe the CFTC must concern themselves with is the rule by which the Fed has been allowing banks to hold the values of assets backing mortgage securities at their originally financed value rather than appropriately reducing these values after the major decline we have had in these markets.

    By not using current asset values, there is a large amount of risk that is not being accounted for that should be included in the swap premiums in current markets. This type of risk management is adding more risk to the penalties paid by taxpayers in their transactions and avoids the normally seen increased asset requirements required of lending institutions in order to properly balance their books. This is very detrimental to the process of events needed to recover from this mess but it also adds continued risk to the current markets that would make another severe recession much more likely.

    The failure of the Fed to require that banks use the current market values in the calculation of banking assets requirements is certainly defrauding the American public as well as those investors around the world who hold mortgage-backed securities. We must not allow this condition to be continued in face of the likely onset of a second recessionary phase of this prolonged recovery.

    The numbers show that the total market risk of global derivatives exceeds the total of all global market assets by more than 12-fold. This excessive risk certainly bodes for a major catastrophe should there be a major default by sovereign nations that would transfer derivative risk onto other nations in a cascading fashion. Why is the CFTC allowing the derivative risk in the global markets to exceed the real value of the assets backing these bets? This is indeed the greatest risk of the occurence of a global catastrophic event.

    The CFTC must address the excessive derivatives risk in the global markets immediately in order to avoid holding the world's economic future in the balance. Please make the focus of the CFTC reducing the derivatives risk to an amount that represents the actual value of the assets held by the markets for which these derivatives have been created. To do otherwise is to deny responsibility to the public.

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