The Davification Of Trades

Do you remember Dodd-Frankification?  How about the transparencyification of the swaps market?  Well, it didn’t start out with “ification.”  It started out with “ify” such as swapify and songify and Daveify which were much simpler concepts than the frankly more comprehensive Doddification of the price discovery mechanism.

Just think back a little bit to back when the global financial crisis began and I’m sure you will remember how the songify trend really started.

There was the Bed Intruder song.  I know you remember it.  Who could forget having their people “snatched up” like that.  Over 110 million views is no Youtube slouch and we’re talking years before Gangnam style exposed the global reallocation of precious metals from the Occidental to the Oriental and when public housing was still considered a successful strategery, correction strategerification. .

Then there was Jimmy McMillan who took rent-seeking to a new top 40 hit level in his songification praising state Governors and “the economic state of emergency as the way to go” in the New York Gubernatorial race.  There’s nothing else to be said when it all boils down to the fact that “only a governor like the father of a house can put everything in control.”  (Parental Guidance Suggested)

Finally the crisis was crystalized by Charlie Sheen in his epic 47+ million view Youtube explainification of the bi-winning while banging rocks in his own personal prison as he brought transparency to all of us by offering to allow us to borrow his bi-polarified body & brain functions driven by tiger blood for the purpose of “righting every wrong” all while operating in one gear – GO!

Now that the run-up to the final swaps determination courtesy of the CFTC’s dog years-ification of the build out of their transparency flux capacitor only led to a mass evacuation of the swaps market (at least for energy traders and what other form of value is there than energy… oops, I almost forgot gold) back to the futures market.  I know this is getting a little technical, so I’ll allow the same man who describes the high frequency market as “cheetahs” not “cheaters” to explain.

Presenting Bart Chilton:

Finally, while I’m interested in hearing the concerns about futurization, I am more concerned about, a silent creeper. That is, the “swapification” of the futures markets. Specifically, I’m concerned that the conversion of certain standardized cleared swaps will be under-regulated–under-regulated–in the futures markets. It may be block rules or something else, but we need to be cautious about converting certain swaps to futures in an attempt to export the deregulated, opaque swaps trading model to these new futures markets. Let’s be cautious about allowing lax oversight of these futures contracts, regardless of how they were treated before they were futurized.

If you missed the key word, that would “cautious.”  You see when the CFTC allows “lax oversight” it puts Bart at risk because the last time I saw a video of the chairman of Bart’s commission and Bart discussing “lax oversight” it had to do with suggestions by the Chairman that Bart was going to have to start signing off with is own signature on that oversight.  It’s nice being a commissioner and all, but I don’t think Bart wants to end up busting rocks with Bernie Madoff in some country club owned by Corrections Corporation of America.

Here’s a link to the commissioner’s full statement:

Here’s part of the problem.  Under the Dodd-Frankification sausage system of grinding up the little guys and turning them into game day Little Smokies for the big guys, there is a limit to the level at which someone who deals in swaps becomes classified as a swaps dealer.  It’s kind of like selling used cars.  You can sell a couple every year, but if you sell more than a couple, then you’re a used car dealer and you’re going to need to be licensed and taxed accordingly.  That’s where swaptions (a form of swapify or swapfication) and the Futures Industry Association Principal Traders Group comes in.

Presenting Walt Lukken, President and CEO of the FIA:


Finally, because options are generally traded as spreads or more complex strategies, it does not make sense to compute each component of the transaction individually as if it were a standalone trade. For purposes of calculating the notional value of a transaction which includes multiple options legs (call spread / put spread / straddle / strangle / butterfly) we believe the notionals of all options that were executed as part of that transaction should be added together. This is consistent with the guidance given on computing the notional for a collar4. Furthermore when a trade containing multiple legs is executed the exposure of the trade is not the two legs evaluated separately but the net of the two legs. This is consistent with standard netting of cash flows in OTC swaps and with the notional calculation for locational swaps.

…. and again…
For purposes of calculating the notional value of a transaction which includes both swaps and options, we believe the notionals of the swaps should be added to the notionals of the options that were executed as part of that transaction. Again when a trade containing multiple legs is executed the exposure of this trade is not the two legs evaluated separately but the net of the two legs. This is consistent with standard netting of cash flows in OTC swaps.

For those of you who may be suffering from a Dorito hangover following Super Blackout Bowl Sunday, please allow Dave to explain the new Chiltonified math of swapification and futurization to you in terms that even someone who pays thousands of dollars to sit in the dark in downtown New Orleans will understand.  The final score in the Super Bowlification as calculated by the Dodd-Frankification as understood by the Futures Industry Association would be Baltimore Ravens (three) – San Francisco Forty-Niners (zero).  That’s how it works when you’ve got legs.  It’s not how long your legs are according to Mr. Lukken, it’s the difference in the length of the legs and as explained in commercial terms that even the attractive side of GoDaddy could understand, not the total points scored (34 to 31) that counts.

When you’re building a derivativication equivalent of the twin towers of Babel, it’s not the total notional height of the skyscrapers that count, but merely the difference between the height of the assets versus the height of the liabilities and we’ll call that capital.  The fact that it’s a quadrillion plus derivatives market that is twenty times taller than global GDP is of no concern to Charlie Sheen or any other Rock Star from Mars because gravity isn’t an issue when you’re #Winning.

Here’s the full letter from Mr. Lukken on notional value computation methodology (i.e. notionalified valueification):

For the small operators who are going to be pushed out as the concentration of the markets coalesce around I.C.E. and the Comex, supposedly the answer to these questions on how you are being harmed without being harmed were already answered here:

For the Bloomberg report on how to get a standing room only crowd to show up at the CFTC when their star regulator, Bart Chilton, winner of Dave’s Noam Chomsky linguistic wordification inventor of the year award and all around regulatorarrhea externalizer was unfortunately unable to attend the meeting, plus a great close-up for those who are attempting to locate Gary Gensler’s jugular click here:

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