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Thread: derivatives - the 'tip of the iceberg' breaks the surface

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    Default derivatives - the 'tip of the iceberg' breaks the surface

    (snip)"The recent sharp falls in stock markets appear to have been exacerbated by an unusual wave of derivatives activity on the part of hedge funds and big banks, traders yesterday indicated.

    In particular, some banks and big investors appear to have been forced into selling large amounts of equity futures because they have been acting as counter-parties to large, leveraged bets on the direction of stock market volatility in recent months - and these bets are now unravelling because volatility has increased sharply.

    This forced selling has hurt equity futures index prices on markets such as the London International Futures Exchange - and depressed the value of cash equities as well, some observers suggest.

    "This is an incredibly sensitive topic but it looks as if some big investors are being forced into big moves because they need to hedge these [derivatives] positions," one senior trader said yesterday.

    It is impossible to track this type of derivatives trading with accuracy, since the investors and banks engaged in these markets are extremely anxious to keep their positions private."(snip)

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    Default Re: derivatives - the 'tip of the iceberg' breaks the surface

    immediately followed by ...



    (snip)" Quarles said that since the end of 2004, questionable behavior in the financing and futures markets has increased, including traders holding concentrated positions and increased control of individual Treasury issues among a small subset of Treasury market participants.

    "We understand that very large positions in and of themselves may be benign, but large positions coupled with very tight conditions in cash and financing markets can lead to questions," he said.

    Quarles further warned that there are risks that disruptive market behavior could increase in coming years. For example, the potential for market manipulation has risen as the expansion and consolidation of the financial services industry has increased the number of institutions capable of taking very large positions in Treasury markets.

    This has raised the risk that a single firm can gain effective control over a particular issue, he said. "(snip)

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