New Fed Financial Stability Commission To Focus on Next Crisis

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New Fed Financial Stability Commission To Focus on Next Crisis
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As some inside the financial services industry have mapped the potential for the big bank derivatives to implode, and warnings have been delivered at various levels of the U.S. Federal Reserve as well as discussed at high levels with derivatives regulators, comes the Financial Stability Committee.

Fed’s Financial Stability Commission will include Stanley Fischer, Daniel Tarullo and more

The committee will include Fed Vice Chairman Stanley Fischer, said to be a powerful behind the scenes force at shaping Fed policy, and Fed governors Daniel Tarullo and Lael Braindard.  The goal of this committee is to monitor the financial system for asset bubbles and emerging problems, according to a report in the Wall Street Journal by Victoria McGrane and Pedro Da Costa.

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Fischer, said to be a bank favorite with deep roots in the clubby international central banking community, was appointed after Larry Summers, known to be a big bank favorite, failed to obtain the nomination from US President Barack Obama. Financial reform advocates had vocally opposed Summers, who has been involved in lobbying against derivatives regulation and was said to be the big banks point man involved in the conspiracy to remove Brooksley Born as CFTC Chariman.

Fed officials aware of the next financial crisis

It appears as though government officials are aware something could be in works as this committee, along with the formation of other government efforts, is an effort not to fall prey to the same mistakes that occurred in 2008 – when big banks were considered beyond reproach and regulators didn’t identify the core derivatives implosion point. Now with much more leverage behind the problem – there is $700 trillion in notional exposure, enough to wipe out the world economy more than seven times over – government regulators appear to be paying closer attention this time. The question is will they act truly independet, or at the behast of the large banks, which are known to have significant influence at the Federal Reserve if not have ownership of the organization, a topic the media typically avoids for some reason.

Much of the big bank exposure is said to be correlated to interest rate volatility, which is logically being projected to increase in the coming years. Financial insiders speculate that other government reports, such as a government report on the Flash Crash, have been highly influenced by outside financial powers. This new Fed organization is likely to be at the center of the next derivatives implosion and will likely be tasked with identifying the cause of the implosion, which will be a point to keep a keen eye on big bank insiders.

Fischer’s team

Fischer’s organization joins a panel of top regulators who formed the Financial Stability Oversight Council and the Office of Financial Research, physically located down the street from the White House in the Treasury Department, who are now focused on what those inside the hedge fund industry have been warning about.

Currently certain hedge fund managers are keeping close track of the derivatives implosion points, a risk management exercise that involves various types of financial models.  Among the risk management components being considered is the withdrawal of stimulus from the U.S. economic picture, the relative value of U.S. Treasury products, underlying derivatives exposure to volatility, the dominance of the US “Petrodollar” and several other factors that could lead to an implosion trigger.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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