Systemic risk and competition in OTC derivatives dealing: evidence from client failures

Abstract

We examine the extent of systemic risk and competitive interaction in a segment of the financial services industry: over-the-counter derivatives dealers. Using an extended series of derivatives-related failures in the 1990s, we analyze the investor reaction to the clients' losses for the directly-involved and non-involved derivatives dealers. We find that the involved dealers experience significantly negative stock returns around the announcements of losses by their clients. In contrast, non-involved dealers experience positive event period returns, revealing a competitive effect. Over time, as new losses are revealed, the competitive effect for the still non-involved dealers becomes more pronounced. An expanded industry definition including securities brokers, dealers, and advisors results in a significant and negative reaction. This finding provides support for the existence of industry contagion. A cross-sectional analysis of the determinants of the abnormal returns provides evidence for the existence of information contagion and against pure contagion and systemic risk. Some evidence of moral hazard related to potential government intervention is also detected. Our findings have important implications for the financial services industry in general and government sponsored enterprises and hedge funds in particular.

Berbahayakah Instrumen Derivatif Dalam Konteks Akuntansi?

“…Proses efektifitas lindung nilai tidak perlu dilakukan jika memang tujuan penggunaan instrumen derivatif adalah spekulasi. Namun, proses penilaian instrumen derivatif tetap dilakukan setiap penerbitan laporan keuangan dengan tujuan mengetahui nilai instrumen derivatif tersebut (Emm & Ince, 2011). Walau bursa berjangka dapat mengakomodasi transaksi instrumen derivatif dengan tujuan lindung nilai dan spekulatif, Bappepti sebagai pengawas di bidang komoditi berjangka berusaha mewujudkan agar bursa berjangka berfungsi sebagai sarana pengelolaan risiko dan pembentukan (Lien & Zhang, 2008;Zhou.…”

Do Noisy Fair Values of Derivatives Distort Bank Capital Adequacy Ratios?

“…Many believe that these instruments contributed to the crisis due to the manner in which they were valued and reported (e.g. Emm and Ince, 2011). Since this time, both the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have stated that fair market values are the best option for fair valuation (Securities and Exchange Commission [SEC], 2008).…”