Secret banking elite rules trading in derivatives
Course:- Case Study
Reference No.:- EM13844705

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Secret Banking Elite Rules Trading in Derivatives:

Nine people have a standing meeting in Manhattan one Wednesday each month. This is a highly secretive group of powerful people across Wall Street, known by critics as the "derivatives dealers club." The membership and dis¬cussions are strictly confidential. The focus: Protect the interests of the largest firms on Wall Street that serve as dealers in the highly lucrative derivatives market. Deriva¬tives (swaps and options) are financial products used like insurance to hedge financial risk. Because derivatives do not trade on formal exchanges like stocks on the New York Stock Exchange (NYSE) and are largely unregulated by agencies such as the Securities and Exchange Commission (SEC), their creation and trading is largely self-managed by the firms themselves. This secretive group helps over¬see and control this multitrillion-dollar market.

The dealers' club has attempted to block the efforts of other banks to enter the market and compete with select few member firms. It also has blocked many efforts by regulators and others to get full and free disclosure of dealer prices and fees. The situation is similar to a real estate agent selling a house and the buyer only knowing what he or she paid, the seller only knowing what he or she received, and the agent pocketing the rest in fees. These fees would not be known to either the buyer or the seller.

This lack of disclosure has implications far beyond the biggest banks. Pension funds, states, cities, airlines, food companies, and some small businesses use derivatives to offset and manage risk. These parties argue that without transparency they cannot determine if they receive a fair price. What is known, however, is that Wall Street's largest firms collect billions of dollars in undisclosed fees each year from trading these derivatives-fees that certainly would be smaller if there was more transparency and cot petition. These concerns have spurred investigation o anticompetitive practices by the Department of Justice and threats by some legislators. The firms, however, have pow.; erful allies-the many politicians in Washington to whom they've made substantial campaign contributions.

Derivatives dealers' defense is that derivative pric are complex. Unlike shares of NetFlix stock, which are all equivalent--one share has the same price as all the rest terms of oil derivatives can vary greatly. The complexity therefore requires customization, and greater transparency' is impractical if not impossible.

1. Regulators should assert influence over the derivatives market, like they do with stocks, and require derivatives to be traded on an open exchange where buyers and sellers disclose prices and fees.

2. Nothing shoul be done to change how derivatives are bought and sold. If buyers and sellers don't like the lack of dealer transparency then they can choose not to trade derivatives.

3. The derivatives market should be modified only slightly to allow other players (e.g, banks) to provide and derivatives. If they then choose to disclose prives and fees, that is their choice, just as it is the choice of others to buy derivatives.

4. Invent other alternatives and explain.


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The concept of a market in context to the stock exchange, real estate, and face-to-face customer business is different compared to the derivative market. The reason associated is linked with the fundamental concept that derivative agencies help the firms to be immune from any market risk.

For any contractual business, the derivative trading will not let the seller gets effective with price risks such as sudden rise or fall. This is also the reason why airline companies rely heavily on derivative trading to be secure with steady fuel price.

Likewise, the food industries are also relying on derivative trading, such that the price of commodities (wheat, beef, beverages and other products) can be locked and remain constant for a longer time.

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