By Christopher Briem, on October 20th, 2011
I have looked at this a lot, but never had a reason for posting about it. So now I note Bram passed on the image that highlights the conundrum going on Downtown and elsewhere as folks struggle to figure out where to focus their anger. It reminded me of what may be the ultimate financial infographic of all time. See below.
Not new, this has been floating around for quite some time at this point. I believe this is the original source, but it is hard to tell given how much the image has been passed around. This is the reverse engineering one couple did of what happened to a single mortgage as it went from the signing of their promissory note and down into the rabbit hole known as the financial markets. I keep trying, and failing, to find George Bailey in there somewhere. As much as the name and cartoons are far more accessible to the general public, this is a far more accurate representation of what is otherwise known as Toxie in other circumstances (I have no reason to think Dan and Teri are themselves anything other than good credit risks).
So let’s say you were angry over the foreclosure crisis.. where in this diagram is the center of gravity that you would vent your anger at?
By Trace Mayer, on September 20th, 2011
The balance sheets of banks have derivative singularities sucking in any equity that passes near the event horizon.
The world is in commotion but the precious metals markets are in forward motion like never before. Both the Eurocrat’s totalitarian dream and Euro are evaporating while the Damocles sword of credit default swaps hang over the countries’ heads.
The next round of The Great Credit Contraction has started in Europe with Greece in the target sight. While the world scrambles for liquidity capital is burrowing into and oscillating between FRN$ and gold. This consolidation in the gold price and silver price is laying the foundation for the next major up leg.
 200 DAY MOVING AVERAGES ARE RISING
The 200 DMA acts like gravity on the price of assets allowing for the relative comparison over time which helps to filter out the daily trading noise. The recent melt-up in the gold price since July has added nearly FRN$300 or €300 that needs to be digested into the 200 day moving average. Keep in mind that 200 days ago was the beginning of March and the gold price was a mere $1,420 per ounce. The 200 day moving average for gold is now at FRN$1,511.69 and increasing at approximately FRN$1.85 per day.
 The silver price is also consolidating its recent gains. With a current silver price around FRN$40 and a 200 day moving average around FRN$35.76 and adding about four cents per day. So, two more months of consolidation and then the next move up.
 Gold is currently consolidating its price 10% faster than silver and is confirmed with the relative price at 1.1133 for silver as compared to gold’s relative price of 1.1771. Of all the precious metals gold appears to be the most expensive. The real value seems to be in palladium which is trading at an extreme discount of 0.9224x its 200 day moving average.
Gold has likely seen a great increase in monetary demand from Europeans who do not want exposure to counter-party risk from bankrupt and insolvent. The banking crisis is far from over and for holders of capital that is at risk it must be extremely scary. Sitting in allocated gold or other precious metals held in segregated, audited, secure and insured storage, like with GoldMoney, would be a much more comforting position than in Societe Generala, UBS, Unicredit, etc. As Bloomberg reported on 19 Sep 2011, “A gauge of banks’ reluctance to lend to each other in Europe rose for the first time in a week amid renewed concern Greece is headed for a default.”
This is likely one of the reasons platinum and palladium are priced so cheaply. Monetary demand has flowed into gold and somewhat into silver. Forecasted industrial demand is anemic. Less cars and other goods will be demanded and produced. So the price of inputs, like platinum and palladium, fall. Or so the argument goes.
The specter of price inflation should begin an increasingly aggressive haunting of savers and holders of capital.
PLATINUM AND PALLADIUM ARE CHEAP
Platinum and palladium are a great deal right now. Like gold and silver they can never become worthless and, if held correctly, are not subject to counter-party risk. The supply is much smaller and if there is a significant increase in demand, perhaps from investors looking to preserve capital, then their price can increase significantly. Additionally, although platinum is significantly more rare than gold it is, unusually, cheaper in FRN$ terms and palladium is currently an even better deal!
 The platinum to gold 200 day moving is currently 1.19 compared to the current price of 1.00. The price of platinum in terms of gold has not been this cheap since shortly after the first round of the credit crisis when Lehman Brothers collapsed.
 Palladium is a little more difficult to discern through the golden lens. Like platinum it has not been cheaper since the Lehman collapse. Currently its 200 day moving average is 0.51 compared to the current palladium price in gold of 0.40. This makes palladium slightly cheaper than platinum with the current price in gold about 78% its 200 day moving average compared to platinum’s 84%. Palladium also has a significantly cheaper relative price in FRN$.
THE SPECTRE OF PRICE INFLATION
Central banks the world over have followed the Federal Reserve and created tremendous amounts of liquidity in an attempt to stave off the first round of The Great Credit Contraction. Round two is beginning to materialize and they are continuing.
In an 18 Sep 2011 NYT editorial Paul Volcker sent a warning shot to Ben Bernanke about inflation and how once inflation becomes anticipated and ingrained its stimulating effects are lost. Consider that over the past three months the Federal Reserve has increased M1 by 36.7% and M2 by 23.3%. The specter of price inflation should begin an increasingly aggressive haunting of savers and holders of capital. One place they can seek refuge is gold and silver. Another place to go is platinum, palladium or oil.
CONCLUSION
The Great Credit Contraction is destroying wealth, both real and illusory, at a tremendous rate. The balance sheets of banks have derivative singularities sucking in any equity that passes near the event horizon. This should be the real driver for precious metal demand like gold, silver, platinum and palladium; the lack of counter-party risk.
To make matters worse the stewards of fiat currencies have infected the printing presses with their incontinence. When it comes to safeguarding price stability of fiat currencies those like Ben Bernanke who have succeeded bulldogs like Paul Volcker are lesser men of greater sires.
DISCLOSURES: Long physical gold, silver and platinum with no interest in DOW, S&P 500, the problematic SLV ETF, gold ETF or the platinum ETFs.
By Ajay Shah, on September 20th, 2011
A nice story about UIDAI, by Lydia Polgreen, in the New York Times.
A new insight into India’s north-east states: they are part of a region provisionally named Zomia. An interesting article in the Chronicle of Higher Education by Ruth Hammond. The book.
On 21 April 1956, Jawaharlal Nehru did the first convocation address at IIT, Kharagpur. It’s a good read, and it’s surprising how much of it makes sense in 2011. E.g.: in the larger context of history, and looking at it in this way it seems to me that at the present moment there is no more exciting place to live in than India. Mind you, I use the word exciting. I did not use the word comfortable or any other soothing word, because India is going to be a hard place to live in. Let there be no mistake about it; there is no room for soft living in India, not much room for leisure, although leisure, occasional leisure is good. But there is any amount of room in India for living the hard, exciting, creative adventure of life. In case you have not yet seen the Steve Jobs commencement speech, it is worth watching.
How civilised: Literature festivals in India, by Abhilasha Ojha in Mint.
A fascinating story from rural India about the differences between boys and girls on mathematics, by Maia Szalavitz in Time magazine.
Who’s to blame for India’s inflation and India’s Inflation Is a Lesson for Fast-Growing Economies by Alex Frangos in the Wall Street Journal.
When do stock futures dominate price discovery? by Nidhi Aggarwal and Susan Thomas, IGIDR working paper, has some surprising results.
Anupama Chandrasekaran and Vidya Padmanabhan, in Mint, on Indian ventures into farming in Ethiopia.
Raghu Dayal in the Business Standard on the huge opportunities in better India-Bangladesh relations.
Mobis Philipose in Mint, on recent developments in SEBI and on currency derivatives trading.
We need a Hazare in the financial sector by Tamal Bandyopadhyay in Mint. N. Sundaresha Subramanian in the Business Standard. Ex-SEBI member to PM: ID leaked, family at grave risk by P. Vaidyanathan Iyer in the Indian Express. CVC to Fin Min: Probe both sides’ complaints by Ritu Sarin in the Financial Express. And, reportage in India Today. Spat between Abraham, SEBI, finance ministry gets murkier by Appu Esthose Suresh in Mint. Supreme Court wants petition on SEBI refiled by Nikhil Kanekal and Appu Esthose Suresh in Mint. A first and then a second article on these issues, by R. Jagannathan, on FirstPost. An editorial in the Business Standard. Subhomoy Bhattacharjee in the Financial Express.
R. Jagannathan on post offices as banks (on firstpost). And, you might like this related document.
China’s A. Q. Khan problem: an article by Michael Wines in the New York Times.
A great story by Anthony Shadid in the New York Times about being on the run in Syria.
A great article by Paul Berman, in the New Republic, about Islamism.
Why is it so hard to find a suicide bomber these days by Charles Kurzman, in Foreign Policy.
Love and war, by Janine di Giovanni, in the New York Times.
What’s next for the dollar? by Martin Feldstein.
Sussane Craig has a great profile, in the New York Times, of how Howard W. Lutnick brought Cantor Fitzgerald back to life after the
firm was savaged in the 9/11 attacks.
By Bron Suchecki, on May 26th, 2011
I left this comment on the FOFOA blog:
Your point about bullion banks having the best intel is important. Bullion banks are like spiders in the center of a web. They can feel the twitching of the flies in the web and determine the mood of the market better than anyone else and often in advance of others.
For example, if Mints are starting to see an increase in demand and begin running down stocks, they will start to take delivery ex-bullion banks, who as a result now have intel that retail demand is picking up before anyone else sees it in reported coin sales.
London Banker has expressed this idea much better than me in this post:
Over the past 25 years the financial markets of the world have become highly concentrated in the intermediation of a handful of firms, and regulation has been harmonised in the interests of these few firms. …
Sadly, these few global firms have been for some time in “a conspiracy against the public”, and have subverted the organs of public governance and the infrastructure of the financial markets to their purposes. …
Four global banks are intermediaries in 85 percent of OTC derivatives transactions. The same banks dominate prime brokerage. The same banks own large equity interests in the now demutualised exchanges, clearinghouses and even warehouses of the global markets. Naturally, the same banks dominated underwriting of securitised assets. The implications have scarcely been grasped of what this portends in terms of the information asymmetries and the opportunity to manipulate markets without risk.
Each of these roles gives these few banks a view into the positions of market investors. They know who owns what, using what leverage, under what terms, and trading in which markets. Knowing that, the manipulation of prices to impoverish investors and enrich the ruling banks is child’s play with a bit of ill-transparent HFT through proprietary dealing desks and connected hedge funds aligned with the firms. …
The only resilient solution is local, transparent markets with disintermediation of the controlling banks. Eliminating the information asymetries which allow them to see everyone’s positions, leverage and trading activity – and trade and ration liquidity accordingly – would go a long way to preventing further concentration. 
By Ajay Shah, on March 8th, 2011
For the backdrop, here are two key facts. First, the dismal failures of policy in the field of interest rate derivatives has led to a peculiar situation where substantial trading on the INR yield curve now takes place outside India. Second, while RBI has permitted one exchange traded interest rate derivatives, there are a host of problems with this contract. The process of policy reform in this field has been a disappointing experience. RBI seems to have quaint notions that cash settlement is harmful, that derivatives trading on short-dated bonds could interfere with monetary policy, etc.
In this setting, here’s a big move today: cash-settled futures on the 90-day treasury bill. 
By Ajay Shah, on February 25th, 2011
Today, on NSE, derivatives trading showed the following numbers:
| Product class |
Turnover (Billion rupees) |
| Index futures |
353 |
| Index options |
1981 |
| Stock futures |
391 |
| Stock options |
48 |
| Currency futures |
178 |
| Currency options |
30 |
| Total |
2981 |
This is really something: Rs.2.98 trillion notional rupees in a day. It’s starting to sound like a real market.
This data shows an incredible domination of Nifty futures and options. It also shows the massive success of Nifty options.
One element of the options to futures ratio with equities lies in the securities transactions tax, which has distorted the market in favour of options. In the case of currencies, this distortion is absent. Hence, the ratio of options to futures that we see there should reflect the undistorted applications of the products by the market.
Now that the NSE trading community has skills on options, the question arises: Do these skills readily port over into currency options? I believe they should: every good Nifty options trader is a good INRUSD options trader. The same options knowledge should pretty much carry over from equity stock or equity index options to currency options. In fact, with small modifications, the algorithmic trading that is being done on the equity options should readily deploy into the currency options.
So what does the evidence show? Currency options trading (INR/USD only, says the RBI) started on 29 October 2010. I have 117 trading days of data for the open interest of INRUSD options. Let’s compare the rise of open interest starting from contract launch:
The early days of currency futures trading was hard work: the open interest got up to $0.2 billion and stopped growing. In contrast, open interest with currency options has grown very fast in these 117 days. At each contract expiration, it has been much bigger than the previous one.
As a consequence, INRUSD options open interest is now bigger than INRUSD futures open interest, even though the latter has been a market that has been around for much longer:
This is consistent with the story that the Nifty options brainpower would yield a rapid establishment of the currency options market. This also tells us that not all of the domination of equity options is a distortion caused by the differential securities transaction tax.
This rise of the options and futures open interest has done a great deal for the viability of enterprise-scale economic risk management using the currency futures and options, given that the position limit is linked to the overall open interest. The limit is now looking big enough to be of interest to even the biggest Indian companies.
Some older materials that you might like to see:
 
By Trace Mayer, on December 1st, 2010
In this exclusive interview with David Morgan topics discussed include the silver manipulation, concentration of derivatives, differences between paper silver products and what thankfulness. A few of the articles referenced are high frequency fake trading, Reg Howe’s discussion of gold derivatives contracting and concentrating, the GLD and SLV ETFs, Ted Butler and GATA.
Please keep in mind that as the 200 day moving average shows on the price chart that silver is currently very expensive and it appears that silver and gold are consolidating for the next upleg in the new year. However, silver is the restless metal and about 90% of its price movement happens in 10% of the time. Consequently, it can make a particularly exciting speculation at the present moment.
But keep in mind that you are playing against some of the largest money in the world who have, it appears, the regulators and court system on their payroll. The safest way to play is to buy silver and take physical possession. Then you can remain solvent longer than the market can remain irrational. If you apply leverage in any way then you can either be forced out of your position or the exchanges or regulators can simply change the rules without notice like they recently did with margin requirement increases or to the Hunt’s.
NEW BOOK FOR SALE
For those who have not heard a new book went on sale last week called How To Vanish. This is co-authored by Trace Mayer and Bill Rounds. It is an extremely helpful tool for protecting your personal and financial privacy. You may want to check it out. Please stay safe during this holiday season and enjoy your family and friends!
EXCLUSIVE INTERVIEW WITH DAVID MORGAN (14:46)
As mentioned in the interview, the GVZ has declined precipitously in after hours trading on 26 November 2010 despite the massive volume of about $272M of gold for February 2011 delivery.
By Bron Suchecki, on June 30th, 2010
In Gold We Trust is a special report by Ronald-Peter Stöferle of Erste Group Bank. It is very comprehensive and well worth a read because it covers across its 65 pages all key factors influencing gold prices, leading to their conclusion that:
“The risk/return profile of gold investments remains excellent. … Our next 12-month target is USD 1,600. We expect the parabolic trend phase to still be ahead of us. At the end of this cycle the price should reach our target of USD 2,300.”
In the section “Paper gold vs. physical gold” (pages 36-37) however I would debate the following statements:
“At the moment physical gold commands a premium of up to 20%.”
In the wholesale physical market the Perth Mint is not seeing anything abnormal. Even in the retail market premiums are back to normal (subscribers to Sharelynx can see this for themselves at the CoinPremiums page). I have asked Ronald-Peter where he is getting this number from but no response as yet.
“According to Paul Mylchreest the London OTC market trades 2,134 tonnes of gold every day. This is 346 times the daily production and close to the global annual production.”
This point is presented as proof of a discrepancy between the physical market and paper gold market. As discussed in this blog post, I don’t see any problem with this rate of turnover. In his report Mylchreest concluded that gold’s 12.7% turnover “is excessive and doesn’t pass the smell test.” My alternatively conclusion is that “the very fact that gold is no one’s liability and cannot be printed means it attracts a disproportionate amount of trading and speculation. … Could not the 12.7% figure be proof of the special monetary nature of gold, proof that it is the King of Currencies?”
“According to Jeff Christian, founder of CPM Group, the trade on the LBMA is based on a leverage factor of 100:1″
Mr Christian has stated that he was talking about COMEX paper trading versus physical COMEX deliveries. There are some who think he is trying to retrospectively cover up his admission. My view is that a 100:1 fractional is ridiculous considering the crucial role London plays in the physical market. London unallocated simply could not function on a 100:1 ratio in my view. Those who accept this number do not appreciate to amount of physical delivery made ex-unallocated accounts by the trade. In any case, Mr Christian actually confirmed the fractional/leverage ratio of bullion banks at around 10:1. See this blog post.
“The volume of gold derivatives is worrisome as well. According to the Bank for International Settlements, the nominal value of all gold derivatives at the end of 2009 amounted to USD 423bn.”
I have often seen the nominal value referred to and while it produces an impressive number the way it is presented is often misleading on two fronts:
1. Common interpretation of these numbers is that the market is short $432bn worth of gold. In fact the nominal value is the summation of both long and short positions, it is not a net figure. If one looks at the BIS figures it can be seen that bought and sold options somewhat net out (although it is not that simple because of differences in dates and strikes).
2. Nominal does not equate to actual value at risk. As per the BIS report: “Nominal or notional amounts outstanding provide a measure of market size and a reference from which contractual payments are determined in derivatives markets. However, such amounts are generally not those truly at risk. The amounts at risk in derivatives contracts are a function of the price level and/or volatility of the financial reference index used in the determination of contract payments, the duration and liquidity of contracts, and the creditworthiness of counterparties.”
They note that “Gross market values provide a more accurate measure of the scale of financial risk transfer taking place in derivatives markets” and if one looks to page six of the report it states that the gross market value of the $432bn nominal figure is actually $48bn.
There is also the issue of what the actual delta-adjusted position (see page 10 of GMFS Hedge Book for an explanation) of the $432bn nominal gold derivatives and real impact on the spot market, but that is getting a bit technical. The point is don’t get over excited by the $423bn figure and assume it means the market is short 10,000 tonnes of gold.
By Richard Daughty, on May 21st, 2010
I was sitting alone in The Mogambo Bunkeroo (TMB) thinking to myself that it seems unnaturally quiet around here lately, probably as a result of everyone holding their breath in anxious dread and anticipation since the Federal Reserve is not creating money with their habitual insane abandon, and Total Fed Credit was actually down $1.2 billion last week, which, given the total Fed Credit is a staggering $2.310 trillion, is a rounding error.
TheInternationalForecaster.com has a different take on this unusual quietude, and refers to “the deafening silence in the media and newsletters concerning the Quadrillion Dollar Derivative Death Star”, which references the disgusting, convoluted spider’s web of weird derivatives, and derivatives on derivatives, all based on lies and leveraged fraud, as far as I can tell.
If you want a way to understand leverage, remember there is only $927.6 billion in actual US coins and paper money in existence. Thanks to the insanity of derivatives like massive fractional-reserve banking (where the fraction of deposits that are held in reserve against about $12 trillion in US bank loans and leases, and another $12 trillion in deposits, steadily ran less than the mere pittance of $40 billion for over a decade, thanks to that bastard Alan Greenspan at the Federal Reserve at the time. And bank reserves are still only $65 billion under Bernanke!), this little bit of cash money was morphed into $17 trillion or so in the stock market, plus another $14 trillion or so in the bond market, plus a housing stock valued at $17 trillion or so, plus a couple of hundred trillion dollars in bizarre derivatives here and there.
In short, this piddly $927.6 billion in actual cash has been multiplied thousands of times over, so that people could go into debt to pay for all these things and so, so many more. And all of this in a $14 trillion GDP!
So you can see that derivatives dwarf everything else. The true size of the total of derivatives outstanding is understandably hard to compute, and that is why it was interesting that the Bank for International Settlements (BIS) calculates that there are about $620 trillion of derivatives floating around the world, and some estimates from others have gone as high as the incomprehensible $200 quadrillion, all of which seems Too, Too Bizarre (TTB) for words since global GDP – the sum total of all the goods and services produced by the Whole Freaking World (WFW) in an entire year – is only around $60 trillion!
But the BIS’s estimate of $620 billion in derivatives means that there are over $10 in derivatives for every $1 of global economic activity, which is like one guy at the roulette table betting $1 while 5 guys around him are each betting each other $2 on whether the guy wins or loses!
I say this without fully understanding anything, which is OK with me since I am kind of stupid and would probably get it all wrong, anyway, but I feel very confident in my universal condemnation and disgust with the whole mess, mostly since I never heard of anybody saying, “I got rich from derivatives!” and, in fact, the opposite is manifestly true.
But this financial insanity is just a small, small part of the Sheer Economic Insanity (SEI) of the Federal Reserve creating So Freaking Much Money (SFMM), and as to the implications, I join with The International Forecaster in saying that “if people truly understood the implications, they would be buying gold and silver by the truckload, along with their related shares, which together comprise your only salvation at this point.”
I know what you are thinking. You are thinking to yourself, “Well, maybe they are both just saying that because The International Forecaster is as stupid and crazy as that Mogambo lowlife idiot!”
Well, I doubt that, especially since I never heard my wife yell at them for being idiots, or heard her say how the only real idiot around here is her for putting up with them all these years, or go into one of those episodes where she ends up crying out, “Oh, death, where is thy sting?” about something they did, or didn’t do, but should have or shouldn’t have, depending.
Well, questions of my mental capacity aside, to buttress our joint opinion about gold, they note that inflation in prices is showing up in imports, as “The import price index reached 0.9% in April compared to 0.5% in March”, which is bad enough inflation in prices to give you the shakes, but, worse, “Over the year, the import price index registered 11.1% in April.” Yow!
And if the horror of 11.1% inflation in prices, or the looming horror of disastrous hyperinflation in prices thanks to the central banks of the world creating So Freaking Much Money (SFMM) is not enough to scare you into getting into your car to drive like a maniac in a screaming frenzy to buy more gold, zooming down the street and even onto the sidewalk when you have to (Honk! Honk! “Outta my way, morons!”), then remember that the Treasury says they only have 260 million ounces of gold (and this is assuming that all the gold is still there, which I don’t believe for a second), which, at the ludicrously low price of $1,230 an ounce, is worth only $319 billion!
Thus, all the gold in Fort Knox is worth, at these low prices, less than a fifth of one year’s deficit-spending in the Obama budget! Wow!
You can “do the math” because I probably can’t, or, if I could, I wouldn’t because it is pointless, since even an idiot like me can see that the price of gold is Too, Too Low (TTL)! And by a Long, Long Shot (LLS), too!
And speaking as an idiot, I am happy that even an idiot can see it, which is probably what makes me tingle all over and say, “Whee! This investing stuff is easy!”
Comprehending the Enormity of Derivatives originally appeared in the Daily Reckoning.
By Ajay Shah, on April 23rd, 2010
Exchange-traded derivatives originally only did commodity underlyings. The world’s first financial underlying was : currencies. On 16 May 1972, the Chicago Mercantile Exchange started trading in currency futures. To any finance person, nothing is simpler than a currency futures, but unfortunately in India a mixture of ignorance, ideology and turf considerations has hindered progress.
In 1996, when NSE had just got started talking about equity derivatives, I happened to be session chairman in a conference organised by Invest India titled The future of India’s stock exchanges and I remember asking Ravi Narain something like “Have you thought about other underlyings? Would you trade currency futures?”. Ravi leaned into the mic and said “We’d love to.”.
Most people in India were blinded by the notion of `RBI turf’ and did not think seriously about this problem. When I look in my media archive I see a bit on currency futures in Extracting information from finance, August 2006, and in a few pieces before that, but this was not seriously on the policy radar. When any discussion about this took place, various RBI personnel would claim that futures trading would somehow make Mother India unsafe.
In the Indian discourse, the committee report on Mumbai as an International Financial Centre, chaired by Percy Mistry (April 2007), had the first clear text on currency derivatives.
In April 2007, a column titled Currency futures now, emphasised the links between a well functioning currency derivatives market and the ability of the economy to absorb exchange rate fluctuations. (This remains the best response to Shankar Acharya’s column in Business Standard today, where he bemoans the shift away from administered exchange rates. The price of steel and crude oil and the dollar fluctuates: get used to it and get the right derivatives going).
It took 36 years from the date of the innovation (currency futures at CME) to get started with trading in India. On 2 September 2008, I was complaining about a crash in productivity. On 3 September 2008, I got a first detailed look at the liquidity of the currency futures market.
In a year, on 23 September 2009, one could cautiously suggest that currency futures liquidity was ahead of that on the OTC market. This was clearly visible in the article by Gurnain Kaur Pasricha on 25 November 2009. Here, we were on new terrain: nobody else in the world had done this other than Brazil. The global first-mover, the CME, envies the NSE currency futures contract.
And finally, on 21 April and 22 April of this year, we see signs that the currency futures are more liquid than the Nifty futures.
There is nothing innovative about launching currency futures. There is nothing more commoditised and better understood than an exchange-traded clearing-corporation-settled cash-settled contract on a currency. But the mixture of ignorance, ideology and turf battles that impedes progress in India is alive and well. Currency forwards (and the NDF market) are the only choice for FIIs, who are banned from using the exchange-traded currency derivatives.
RBI believes that with interest rate underlyings, cash settlement is somehow dangerous and that derivatives trading on short-dated interest rates will interfere with the conduct of monetary policy. I wonder how that is reconciled with OTC interest rate swaps involving MIBOR, and with the fact that all good central banks in the world are doing monetary policy without banning either cash-settled interest rate underlyings or short-maturity underlyings.
In short, this is a good story and a bad story. It is a good story in that in the end, we are one of the best countries of the world in terms of getting exchange-traded currency derivatives to work. It’s a bad story in that it took a lot longer than it should have, and the problems that impeded progress continue to be with us.
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