Are you ready for the next financial meltdown?

[oldfart]

Because it's coming.

The central banks of Canada, Italy, Germany, France, Japan, the Netherlands, Spain, Switzerland, the United Kingdom, and the United States have a "Senior Supervisors Group" (SSG) which reports to the Bank for International Settlements about systemic risk to the international banking system from derivatives trading. Their most recent report issued January 15, 2014 stated:

Our observations in this report indicate that firms’ progress toward consistent, timely, and accurate reporting of top counterparty exposures fails to meet supervisory expectations as well as industry self-identified best practices. Data quality is of particular concern. Additionally, we believe that the supervisors of these firms must
prioritize the effort within the scope of their own work and commit to impressing
upon firms the importance of being able to quickly and accurately aggregate top
counterparty exposures.

Source: http://www.newyorkfed.org/newsevent...ogress_Report_on_Counterparty_January2014.pdf

These are the financial products Warren Buffett called "weapons of mass financial destruction."

Buffett's time bomb goes off on Wall Street | Reuters

The Wall Street Journal's financial editor Francesco Guerrera wrote on January 20, 2014,
of the report,

Watchdogs from 10 European and North American countries released one of the most hard-hitting, and worrying, studies on the financial industry since the 2008 crisis. Their conclusion: Many large banks and their regulators are still unprepared to deal with troubles in the immense market for derivatives.

But instead of shouting their concerns from the rooftops, the regulators buried them under the boring guise of a “Progress Report on Counterparty Data,” emblazoned with their own drab-looking logos. Yet, the nine-page study is worth reading, especially if you are a shareholder in one of the 19 big banks it covers (all the big firms are represented).

The regulatory group, which is led by Sarah Dahlgren, a top Federal Reserve official, was set up after the crisis to fix a key weakness that had been exposed by the turmoil: Banks and their supervisors didn’t have enough information to consistently and accurately know who the counterparties were on trillions of dollars in derivatives contracts.

Unlike stocks, most derivatives aren’t securities traded on exchanges. Instead, they are bilateral contracts between a bank and another financial firm or a company. As a result, figuring out who is on the other side of a deal during a period of financial stress is like looking for a needle in a haystack at night with a candle.

Those wondering whether any of this matters should cast their minds back to 2 p.m., Sunday, Sept. 14, 2008. At that time, derivatives markets were forced to open for an extraordinary trading session to try to unwind billions of dollars in positions held by Lehman Brothers Holdings Inc. With Lehman on the brink of collapse, regulators and Wall Street executives wanted to ensure its failure didn’t endanger the hedge funds, banks and companies that had derivatives contracts with the firm. The session quickly turned into chaos partly because of poor data on crucial details such as the maturities and terms of the derivatives as well as the identities of the major counterparties.

As one trader told The Wall Street Journal at the time: “People were screaming at each other over the phone, asking: ‘How can this work?’” It didn’t. Sunday passed without a meaningful reduction in Lehman’s derivatives contracts, adding to the uncertainty, fear and confusion that haunted the markets the following Monday and for many months to come.

On derivatives, the global financial system was flying blind. It still is, albeit less so, according to the 10 regulators.

In her summary letter to Mark Carney, the governor of the Bank of England and head of an international group of regulators, Ms. Dahlgren doesn’t mince her words. “Firms’ progress toward consistent, timely, and accurate reporting of top counterparty exposures fails to meet supervisory expectations as well as industry self-identified best practices,” she writes.

To be fair, there is some good news: 13 of the 19 firms managed to report weekly data on derivatives contracts to a central database within three days—the standard set by regulators. But some other details are unsettling: Two unnamed U.S. banks provided worse data in 2012 than in previous years. And eight European Union banks, one U.S. and one Canadian firm couldn’t update critical metrics required by watchdogs.....

Regulators are fairly toothless in this respect because they can’t really compel banks to provide derivatives data. And bank executives argue that it is costly, time-consuming and fiendishly complicated to get through the thicket of legal entities, derivatives contracts and counterparties that make up the undergrowth of the financial system. Shareholders should always keep a close eye on bank expenses. But given what is at stake, the cost of avoiding another afternoon like that one on a September Sunday in 2008 seems a price worth paying.

Wall Street Banks Remain Vulnerable on Derivatives Five Years After Financial Crisis - MoneyBeat - WSJ

So are you ready for deja vu all over again?

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