Yes. They make a margin call. But too if OTC derivitives are not on the exchange, how can all the people who trade see the price?
Nutmeg, you are thinking people say "No more derivitives trading, derivitives are bad" But people are saying not derivitives are bad, but derivitives with no regulation are bad.
It is a private contract between institutions leveraged with taxpayer money which the outside world can't view on a screen, loses being backed by us and the profits/fees divied up in the form of bonuses... who the fuck wants to ruin this ham and cheese gig...Pablo Escobar could have only wished he would have had a slice of this..
while it might be nice, there is no reason that everyone needs to know the price that two companies agree upon. what we do need to know is that if these two companies make a bet that could pose a risk to the financial system they have the capital to make good on that bet. how would you like to enter into an option trade with a person who had no intention or ability to pay off if the option went against them?
What I don't get is that if these CDS and other derivatives are unregulated, then who is enforcing payment? If everyone just defaulted on the payment of the CDS and you netted out the gains and losses among all parties that are buyers and sellers of this toxic dog-crap, my guess is that there wouldn't be anything CLOSE to the kind of numbers that this market supposedly represents. What's the worst that happens in that scenario??? Couldn't be any worse than watching tax-payer dollars get funneled to Wall St. execs who are undeserved of it anyway.
vhen, I understand margin, and think that is good. Your post make it sound like I do not understand to have enough money to cover the bet. But I do understand that, that is what I am saying should be.
I guess in this market, you could sell 1000 naked calls with 0 collateral to cover delivery. I could see why they do not want this regulated and through a clearing house. Because how would you be able to sell 1000 naked calls if you do not have the minimum margin requirements. I suspect there is a lot of institutes naked with no backing and the moment this shit is put out in the open it will cause a big fucking mess. Trillions upon trillions.