The trader that has to reverse he gains is not a common occurrence on desks. Any reasonable credit trader for the last year at least has been closing trades via tear-ups/unwinds and not offsetting trades due to c/p risk.

In the end, aside from docs/back office will be no big deal unless LEH files.

I imagine this is the incredibly attractive and extraordinarily comprehensive Ms. Van Duyn who authored this?

My, my, she is really on top of things. She’s been on this since the beginning. Her videos are regularly at ft.com. sharp dresser too!

I’m reminded of the quote a few years back by the editor in chief of Asahi Shinbun, the most important financial newspaper in Tokyo.

He said THE major problem facing capitalism is that the derivatives market was operating in a world completely separate from the “real” economy.

When you think of 480 TRILLION in notional derivatives value and the Clinton administration SCROUNGING around for a pathetic 200 million for childhood vaccinations and this begins to come into focus.

Looks like the derivatives world is starting to “RECOUPLE” with the real economic world.

Matt Dubuque

Rather than entering into a new offsetting contract to produce a net MTM, you'd unwind or novate the original contract.

This means you'd get your MTM paid out in cash on unwind date, and you wouldn't face the jump to default risk on your P&L.

Ok, say the purchaser of a $100mm CDS was Joe Pension fund who held $100mm in FRE bonds, matched maturity.

Joe Pension now takes his FRE bonds out of hock, repoed somewhere, and presents it and that more valuable piece of paper to Dick iBank who wrote the contract. Dick iBank takes the bonds, repos them at the Fed for cash to give that plus 5% to Joe Pension? Is that what is going to happen?

And if so, then what does Joe Pension do with the cash? Buys Treasuries? Buys FRE/FNM debt? And if so, what does this mean for Dick iBank’s capital calculation? Does he suddenly need more capital as a result of the haircutted repo and newly acquired bond position?

tell me, if he were to buy, say 5yr FRE BONDS rather than the CDS's. Is he booking all the coupon payments for the next 5 years, upfront– but to his slight credit–present valued?!

Ditto to Jeremy's thoughts. It just sounds like the foundation for a huge ponzi scheme! why wouldn't he do this a million times over in a year and why even bother waiting for a spread margin of 2%? surely if he is manufacturing profits like that, it's in his best interest to do it as quickly as possible before anyone catches on to the scheme.

I just don’t see why he is so irritated – surely he must have been aware of this risk on this position. Or did he think he was making risk-free profit?