 Mae'n gwybod i'r ddechrau. Mae'n fawr o'r fawr sydd wedi'u chael i gael i gael i gael yma'r fawr. Dydyn ni'n Ddechrau Lleodraeth i chi gael y gwasanaeth, ond mae yw'r gweithio'r ddechrau, wedi'u gweithio'r gweithio'n gweithio'n ddau i'r Moroedd, ond mae'n gweithio'n gweithio ar y cyflodol, a'r byddwn i'n gweithio'n gweithio ar y cwm. Mae'n ddweud i'ch gweithio i'r cymryd o'r cymryd 3CL, ysgolion cymryd yma. Mae'n cymryd 3CL, ac mae Ed Murray, yng Nghymru, yn Llanfyniadol Llanfyniad, yn ddod i'r cymryd o'r cyfrifau o'r cyfrifau o'r cyfrifau. Mae'n ddweud o'r cyfrifau o'r cyfrifau. Rwy'n gweithio'n meddwl i'w hwnnw, oedd yna'n gweithio'n meddwl i'r cyfrifau. He is Alun Overy's global relationship partner for ISDA. ISDA is the International Swaps and Derivatives Association, about which no doubt we'll hear quite a lot tonight, and a senior member of Alun Overy's team which advises ISDA on their global activities. He's Chairman of ISDA's Financial Law Reform Committee, which co-ordinates ISDA's lobbying efforts with international organisations, European institutions and national authorities. He's a member of the Bank of England's Financial Markets Law Committee, currently chaired by Lord Hoffman, and a member of Prime Finance, the panel of recognised international experts in finance, currently chaired by Lord Wolfe. He could have gone down such a different route, because after he left school what he did was philosophy at Trinity College Dublin, and emerged with the top degree of his graduating class. And then look what happened. He qualified in the US and in England and Wales as a lawyer, and is where he is. There's a bit too much ISDA, I think, in the background for him to give us an unbiased answer to the question that he set himself, but he has promised that he will try to. So, I'll hand over to him and he'll speak for about 45 minutes and then give you time to ask questions. So, enjoy. Thanks, Ed. Thank you, sir. I was assuming that once you'd heard the bio, you would know where I was coming from. But I will do my best to give you what I think is the right perspective on the role of derivatives in the financial crisis, at least my view of the correct perspective. I hope a balanced one, but I would be delighted, of course, if there is a discussion and if people wish to challenge my view or express different views, et cetera, et cetera. Now, you may know that Warren Buffett, sometimes referred to as the Sage of Omaha, a famous investor, famously referred to derivatives as financial weapons of mass destruction in his annual report to shareholders of Berkshire Hathaway in 2002. So, quite a few years before, in fact, Lehman's collapsed. More recently, the Nobel Prize-winning American economist Joseph Stiglitz, in an article on the Guardian, blames OTC derivatives and specifically credit default swaps for, if not causing, at least, severely worsening the sovereign debt crisis, at least in relation to Greece. And, of course, it's been, you know, you could cite many other examples of politicians, academics, journalists, and others, lawyers, even outside my area, who, you know, have pointed at derivatives as either the chief villain or one of the chief villains in relation to the financial crisis. So, I just want to look at that and just give you my perspective as someone who's been involved in the derivatives industry pretty much since the beginning of my career. I've been counsel to ISDA since 1994, but in fact I started my practice in New York in 1985 and began to be involved in ISDA working groups from 1986. Now, ISDA itself was founded in 1985, so I know it was virtually in at the beginning of ISDA. And the swaps market itself had only been around at that stage about five years. So, well, first of all, when we're talking about the derivatives, the role of derivatives in the financial crisis, it is helpful to distinguish different phases of the financial crisis. And so I'm broadly speaking, dividing it into two parts. One part is the banking crisis, sort of roughly 2007 to 2009. Now, I'm not saying, you know, we're entirely out of that crisis stage, but I think that, you know, it's generally recognized that the worst of it, the most serious, the most calamitous events to date at any rate, we may have a further part. Of course, one doesn't know, but the worst of that was probably the 2007 to 2009 period. And of course, in the middle of that was the collapse of Lehman's in September 2008. But then also more recently, the sovereign debt crisis, broadly speaking, you know, the last year or two to present. And as you say, you've heard my professional background is and the extent of my involvement in the derivatives industry. I think one of the reasons why, or rather the people who tend to point accusing figures at derivatives, often are quite loose or in exact imprecise as to what they mean by derivative or what they think a derivative is. So I think it is actually important if I just for a few minutes go through what I think a derivative is. Hopefully, when you understand the nature of the product, it's a bit easier to see how it might, what sort of role it might have played in the financial crisis. And by the way, I'm not going to make any mystery of what I think the answer to the question is, did the financial derivatives cause the financial crisis? I'll give you the answer right now. My belief is that derivatives did not cause the financial crisis, but they did considerably worsen it. In other words, they had an important role to play in the financial crisis. So that's the perspective I'm coming at. And I think it's important to understand what derivatives are, how they work, so that you can see what sort of role they played in the financial crisis. And then you can get, I think, a more balanced view as to the kind of role that they may have played. Now, sorry if this is really basic. Do you all know what a derivative is? Well, let me give you my take on it. I think it's helpful, first of all, to have the basic definition, which is a derivative is a transaction that derives its own value from changes in a reference value. That's the sort of, if you like, the kind of a generic definition that I think captures pretty much all of derivatives. And so it's a transaction that derives its own value from changes in a reference value. Now, the types of reference values could be prices of assets trading in an underlying market, either directly equity prices, bond prices, commodity prices, or via an index. Because indexes, financial indices, commodity indices tend to represent fluctuations in underlying prices. But if you like at one, remove via the index. So you have financial assets trading, you have commodity assets trading. So financial derivatives, commodity derivatives. But you also have other variable measures of value, which could support a derivatives contract, inflation, freight rates, rainfall, temperature, bandwidth, et cetera. You have derivatives on all those things. So that would be a topic for another talk as to how you actually write a weather derivative. But the key thing is that each of these types of transactions has a value, a commercial value. That value is derived from the value of assets trading in an underlying market, in a sense, or some equivalent fluctuation in a measure of value. Now, that's the generic definition, but let's look at more specific examples. But before we talk about derivatives, let's consider the most basic type of commercial transaction, a sale. So, a baker buys 50 bushels of wheat from a farmer at today's price of €10 per bushel for immediate delivery. It's the most basic type of commercial transaction. Now, consider the exact same transaction with the one difference that instead of the wheat, I mean it's 50 bushels of wheat, it's an agreed price, but instead of the wheat being delivered today, it's delivered in nine months' time. Now, the only difference between those two transactions is the introduction of time, and yet that second transaction is a derivative. So, you know, a derivative, it's called a forward, and a derivative is created very simply. It's a very simple type of transaction, which is created simply by deferring the time of settlement. Now, what is deferring the time of settlement do? It introduces risk. At any rate, it introduces risk if the item that is to be delivered fluctuates in value. So, I'm assuming that we're talking about an asset that fluctuates in value, wheat prices go up and down. So, for purposes of my example, risk is introduced because the delivery is postponed for nine months. Now, why is risk introduced? Because in nine months' time, the market price of wheat may be above or below whatever the price was that we agreed that the farmer and baker agreed to pay today. So, if wheat prices go up in nine months' time, who is the winner under that forward? The purchaser, because the purchaser is locked in a price that's lower by assumption than the market price. If prices go down, who's the winner? It's the farmer, the seller, because the farmer has locked in a price. Now, why would these parties do this type of transaction? They would do it because in nine months' time the farmer knows he will have wheat or she will have wheat to sell, and the baker knows that he or she will have wheat that they'll need to get in to grind, produce it to flour. I'm assuming this baker is kind of an all-in-one type of business, you know, grind milling his own flour and then baking goods. But the key thing is, one of them wants to ensure a minimum income, one wants to ensure a maximum cost, and they're both concerned about fluctuations in the prices of wheat, so actually they're both hedging. But it's otherwise a very simple transaction. Now, imagine the same transaction, but instead of the parties agreeing that in nine months' time there will be a delivery, instead the baker simply purchases the right to buy 50 bushels of wheat from the farmer at today's agreed price, let's say it's eight euros per bushel for delivery in nine months' time. Now, the baker won't exercise that option obviously unless the market price is above the agreed price. So there's no upside if you like for the farmer. The farmer doesn't get the benefit if the market price falls below, as it would do under a forward. So the farmer has to be compensated up front with some sort of option premium, some sort of option price to take that one-sided risk. Similarly, the farmer might decide to buy an option from the baker to sell the wheat. So the farmer says, in nine months' time I'd like to buy the right to sell the wheat to you at an agreed price. So where a person is buying the right to purchase that's called a call, where they're buying the right to sell that's called a put. Hopefully though you can see that both those types of transactions are actually not far removed from an ordinary sale. Now, let me round that off by saying every derivative is a forward or an option. Every single derivative is a forwarded option or a combination of one or more forwards and options. Well, that's it basically. So in other words, at the heart of every derivative is a very simple idea. So in other words, derivatives aren't intrinsically complex. Now, of course, if you combine several options and forwards, I mean you do get options on forwards and so on and so forth, then you get complexity. But the core ideas involved in derivatives are relatively simple. Now, let me quickly relate those to other terms. You've heard the term swap. Well, perhaps just in view of the time, I'll just take it as read that a swap is a series of forward contracts. A future is a forward contract traded on an exchange. You have transactions called cap collars and floors. Those are variations on options, except that typically a cap is a series of puts, a floor is a series of floors. A collar is a sort of combination of a cap and a floor over a series of settlement periods and so on. So say every derivative is a forward or an option or a combination of one or more forwards and options. And if you thought about my example of the options, you'll probably have realized by now that every forward can actually be broken down into two options. Because a forward is nothing more than the baker buying an option to purchase wheat and a farmer buying an option to sell wheat where they've agreed the same strike price. So in other words, every forward can be decomposed into two options, which means that in fact there's really only one building block, which is the option, at least in a basic economic substance. That's overstating it, because in fact when you put the two options together, a forward behaves in ways that individual options don't behave and so on. But it's still very interesting to know that you can decompose any forward into two options. And if we had more time, I could give you some actually practical examples of my own practice where knowing that has actually made a difference. The other thing you sometimes get is you get a hybrid of a derivative with something else. So an equity index link bond is basically a debt security with an embedded option of some type typically or forward. So it's sort of a hybrid. Now one of the things to know about hybrids is sometimes people point to those and say that is a derivative. Well, that's only partially true. So one has to be a bit careful again as to how widely we draw the set derivatives when we're trying to decide what sort of actions we need to take to ameliorate the potentially negative effects of derivatives in addressing any potential solutions to the financial crisis. So another thing to bear in mind about derivatives is that a derivative is a financial transaction, but it's not a financing transaction. So if you think about the forwards, neither the baker nor the farmer was actually raising money. There's no raising of capital in a derivative, in a pure sense. So it's not a financing transaction. It's not about raising funds, raising capital. Neither party is borrowing. It's about allocating risk. Allocating risk that the wheat price will grow up and down or a bond price will grow up and down or an equity price or whatnot. So it's a risk allocation mechanism and that's obviously important when we look at the role that derivatives played in the financial crisis. Let me give you some statistics. Now these, I'm sorry, the statistics are a little bit old, but as a sort of ballpark figures they're still fairly accurate. These statistics are from December 2010 and they're published by the Bank for International Settlements. Now in December 2010 the BIS estimated there was approximately 600 trillion of notional value of derivatives outstanding at the time. That breaks down into 465 trillion of interest rate derivatives, so about 77% of that total is interest rate derivatives. Further 9% currency derivatives, about 5% credit default swaps, less than 1% equity derivatives, less than half a percent commodity derivatives, and then there's sort of an unallocated group, I don't know what's in that, but presumably that's more exotic things or hybrids, longevity swaps may be in there, whether derivatives may be in the unallocated bit, that's about 6%. 600 trillion, which is a scary number, is actually only notional value. It's a misleading figure in the sense that the notional amount of say a swap is actually a measure of the risk that's being hedged by that swap. It's not actually a measure of how much risk a party to that contract is actually bearing as a result of entering into that contract. The market exposure under the contract itself, if you compare the 600 trillion, the actual gross market exposure, according to the BIS represented by that 600 trillion in notional amount is only 20 trillion, that's still a big number, 20 trillion, but 20 trillion is a lot smaller I would suggest than 600 trillion, so 20 trillion is actually the gross market exposure in the derivatives market, and then if you apply something called netting, which again would be the subject of another talk, but most of the market have netting arrangements in place either by contract or via the rules of exchange, and here we're actually looking at figures for the off exchange market, but once you've applied netting, the BIS estimates that that market exposure comes down to about 3 trillion. One of the things that I want to emphasize about those figures is that the vast majority of OTC derivatives are interest rate and currency, and we don't really read much in the way of articles about the dangers of those, and no one has seriously suggested that those are in some sense at the heart of the financial crisis. I mean there are sometimes politicians who call for a ban on all OTC derivatives, but that sort of bold demand would encompass a huge volume of vanilla allocation of risk in the financial markets, which efficient financial markets suggest adds value to, or rather is an efficient way of allocating risk within those markets. But the one type of derivative that has attracted a certain amount of negative publicity is our credit default swaps. Now as I said, credit default swaps account for about 5% of global volume in at the end of 2010, so let's look at what a credit default swap is in a little bit more detail. A credit default swap is effectively a put option. Despite the fact that it's called a swap, it's not really a swap, and I could explain to you maybe in the Q&A why they call them swaps. They're really not swaps, they're actually a type of option. And it's actually a put. It is the right of a protection buyer to sell corporate debt to a protection seller in certain circumstances. It's a contingent right, so it's a contingent put. It's contingent on the occurrence of a so-called credit event in relation to a reference entity. And a reference entity could be a company if it's a corporate CDS. It could be a sovereign, such as Greece or Argentina. It could be some other type of asset such as a... Well, I'll come on to this later more complex example in a moment. So examples of credit events which would give rise to the right to exercise the put by selling the corporate debt would be a failure of the reference entity to pay some of its indebtedness, a bankruptcy of that reference entity, or restructuring of the debt of that reference entity, and with sovereigns who have similar types of credit events, failure to pay, repudiation, moratorium, restructuring. The strike price of that put is the par value of the debt. So what happens is bankruptcy occurs, the protection buyer puts the debt, so they're entitled to get paid par value for debt that's worth a fraction of par because of the bankruptcy of the company. And one thing I haven't yet mentioned, but probably should have, and I will now, is that any derivative can either be physically settled, i.e. by delivery of wheat, or by delivery of debt, or whatever the underlying asset is, or cash settled. Now if it's cash settled, then typically that means simply looking at the market price, looking at the agreed price, the strike price or whatever, and then paying the difference. So in the baker-farmer example, what you could have had is in nine months' time, instead of the farmer delivering wheat and the baker paying the price of that wheat, if the price were above the agreed price, the farmer could just pay that difference between the contract price and the market price to cash settle the contract. And of course if the market price were below the agreed price, the baker could pay the farmer that difference, which is one of the reasons why sometimes the cash settle derivatives are called contracts for differences. But economically the two, leaving aside transaction costs, economically the two types of settlement are the same. They have the same value for whoever benefits and indeed the same negative value for whoever bears the liability. That's important in all sorts of contexts. So the CDS market started off as a physical delivery market. In order to exercise your protection you delivered the debt. Well what happened when a few years ago auto parts manufacturers and technology startups et cetera started to go into bankruptcy was that the markets discovered there wasn't enough of the debt around to actually settle all the outstanding contracts. So those contracts then became cash settled contracts. And cut a long story short, the cash settlement price was determined by an auction process. So in those instances the protection seller effectively just pays the difference between the par value of the defaulted debt and the agreed value determined pursuant to the auction value. So you can see how it fits into the category of a contract for difference a cash settled derivative. Now a CDS can be written on corporate debt, so you have corporate CDS, corporate default swaps, sovereigns, it can also though be written on securitisation or structured financing debt. And that is really where CDS begins to appear in the financial crisis. And so in order to explain how CDS made a bad situation a lot worse I now need to say a few words briefly about securitisation and structured financing. Now strictly speaking a securitisation, neither securitisation nor structured financing is a derivative although they often involve derivatives. But you can actually put together a securitisation without a derivative in sight. It isn't necessary in other words, it isn't essential at least to a classic securitisation to have a derivative involved. Typically there are derivatives involved for reasons I'll mention in a moment but you don't have to have one involved. Now there are however something you may have heard of called synthetic securitisation. Synthetic securitisation does at its heart have a derivative and synthetic securitisations were crucial to the worsening if you like or the expansion of the financial crisis. But let's just look briefly at what we mean by structured financing or securitisation. For present purposes I'm going to treat those as synonyms. I mean they're broadly similar techniques and maybe again during the Q&A if people feel it's relevant we can perhaps distinguish between securitisation and structured financing. But broadly speaking what we mean by that is that someone, an originator, let's say a bank takes a portfolio of debt, sets up a special purpose company usually called a special purpose vehicle, an SPV and then sells all of that debt or that portfolio of debt to that SPV. Now where does the SPV get the money to pay for the debt? It issues securities into the market to investors and then it uses the proceeds of the securities issue to buy the debt. Now this is a way in which capital markets investors can take on risk in relation to types of debt that otherwise are only available to bank lenders for example or other types of lenders. That's what's called securitisation. You've turned other types of debt like corporate loans, student loans, credit card receivables, trade receivables you've turned them into securities which capital markets investors can invest in. Why would capital markets investors want access to that type of debt? Well, really just the search for higher returns because a lot of times those types of debt are riskier and therefore the securities representing that risk carry higher rates of interest. Now what was the role of this technique of securitisation in the financial crisis? Well in the financial crisis of 2007 to 2009 that sort of period when things really started to go bad in which that period is well chronicled in a number of books but one particularly fun one to read I suppose is The Big Short by Michael Lewis but there are some perhaps slightly more serious ones. The general story goes that the real toxin that is at the heart of the financial crisis was residential mortgage loans made to borrowers in the US on ridiculous terms up to and beyond the value of in many cases of the actual mortgage property so that on any sort of sensible measure money was being lent to people who couldn't repay it and that toxin was distributed through the financial system via securitisation and structured financing so a dodgy residential mortgage lender would accumulate a portfolio of almost worthless loans made to borrowers with no hope of repaying them and then the lender would transfer all those loans to a special purpose vehicle the SPV would issue securities, get in investors money and then in effect take these worthless assets from the lender, of course I'm slightly exaggerating or oversimplifying for dramatic effect but broadly speaking that is how the toxin entered the system now why would investors lend to such an SPV because they misunderstood and or were misled as to the nature of the risks in that portfolio they believed that actually that portfolio of debt wasn't as bad as it sounds but there was also a belief that somehow the structure of the debt issuance alleviated some of the risk via a technique called tranching so how does that work well in the securitisation typically the securities issued by the SPV are issued in different classes that's sometimes referred to as the capital structure so there would be an equity class and then an unrated subordinated class and then maybe a triple B class, a double A class, a triple A class and then actually there would be a class above that believe it or not a triple A plus sometimes called super senior and it's been a while since I've looked at these precise figures but I think in terms of order of magnitude the equity bit might be 8%, unrated subordinated debt might be about 10%, 5% to 10%, triple B 3%, double A 3%, triple A 6% so 70% of the capital structure might be actually better than triple A according to this structure now what do these mean what do I mean when I say it's better than triple A for example well the way the tranching works is that if there is a loss in the underlying portfolio it's agreed that the party that holds the equity piece will suffer the loss first and only until the losses accumulate to the level where they equal 8% of the capital structure when 8% in other words of the debt issuance has defaulted only at that point will there be any deduction from repayment in relation to the higher tranches and so you roll on up through the capital structure you know the losses then hit the next tranche and then the next tranche and then the next tranche and the ratings assigned to the tranches reflect the view of the rating agency that the risk of the triple A tranche is triple A the likelihood of default is very small and when you've analyzed that bit then of course everything above that must be then better than triple A because it's super senior now super senior is better than US government at least you may remember there used to be the days when the US government was triple A and AIG had masses of that triple A super senior debt sorry but of course if the whole portfolio is bad if your assumptions about the credit worthiness of the portfolio are completely wrong because you've misunderstood you've misanalyzed the risk then in fact you know that so-called better than triple A risk is actually much riskier and yet because AIG purchased it at a time when it believed it was better than triple A it gets very little compensation for taking that risk so that was one of the reasons why AIG was one of the first one of the primary victims of the financial crisis now as I said there are no derivatives I'm fairly involved in a true sale securitisation because the actual debt and the portfolio I've mentioned gets sold to the SPV but you can create the same thing synthetically by instead of having a sale of that debt from the originator to the SPV you can have a CDS in there so that the originator keeps the debt but buys protection on it so the originator, the bank lender or the residential mortgage lender will get paid par in relation to any defaults in the portfolio and of course then the losses will fall on the investors distributed through the capital structure and the way I've just mentioned but in fact the debt does not actually shift from the originator to the SPV now so that's by greatly expanding well one thing perhaps you can see one conclusion you can draw from this is that you don't actually need you can write multiple synthetic securitisations on the same portfolio because you don't actually have to transfer anything so that's one way in which you can vastly expand the risk the other thing is that generally speaking in classic securitisation there would be serious due diligence done on the underlying debt not sure that's always been true but at least the custom was to do proper due diligence on the stuff that was being transferred into the SPV but with synthetic I don't know if there's something about the nature of synthetic risk or not but it became it just became the custom for there not to be serious due diligence done perhaps we can explore why that might be so synthetic securitisation another thing so you also may have heard of terms like CDOs collateralised debt obligations CDO is essentially a securitisation of structured financing of the type I've just mentioned where the portfolio rather than being student loans or corporate loans are bonds of some types debt securities of some type although you also get collateralised loan obligations collateralised bond obligations and so on you get collateralised fund obligations all those are different types of CDOs and one of the types of debt obligations you can put into a CDO of course is another CDO so you have a CDO on a CDO and it's called a CDO squared and indeed you sometimes get CDOs on CDO squared so CDO cubed now again you can imagine if people are doing these slightly wacky things CDO cubed there's one layer after another between the ultimate investors and the actual risk that again seem to create this false sense of security about that somehow the risk was sort of just running into the sands being dispersed by these rather clever mechanisms instead of running straight through to AIG but of course in fact what we saw was it was actually just a straight pipeline of a financial toxin straight through to the end holder so that in a sort of cartoonish sort of way that is a sort of overview of how structured securitisation and structure financing were at the heart of the banking crisis and hopefully you got some sense and if you didn't hopefully maybe I can expand on it in the Q&A as to the role that CDS played in that but note there was no role of interest rate derivatives there no significant role that I am aware of no significant role of FX hedging there no suggestion that those somehow contributed to that crisis just CDS and only CDS in the context of structured financing now more recently and more briefly we have credit default swaps being pointed out and demonised in relation to the sovereign debt crisis and I there I mean you know many senior government officials including Angela Merkel and Nicholas Arcosi and others seeming to blame the credit default swap market at least in part the so-called naked speculators driving sovereign borrowing costs up to the point where they could not be sustained as though there was no actual problem with underlying problem but just a group of reckless cutthroat slightly malevolent speculators and even Joseph Stiglitz who I mentioned at the outset had recently said in an article in The Guardian that he believed that the European Central Bank was to some extent adapting its policy or distorting the policy it might otherwise have taken vis-a-vis Greek debt to avoid credit protection on the Greek debt being triggered just to protect banks who were protection sellers and is felt it should issue a refutation of that and I can give references to those articles both pro and con if you're interested in that but I think just to highlight some of his responses to comments made by Joseph Stiglitz CDS are actually surprisingly transparent one of the regulatory solutions to some of the criticisms of derivatives have been to require derivatives transactions to be reported to trade repositories and CDS was one of the first classes of derivatives to be reported to trade repositories and generally speaking regulators around the world have access to those trade repositories so they're actually transparent as to players and as to amounts of exposure secondly the amounts involved are actually relatively small there's about 3.2 billion in exposure via CDS to Greek sovereign debt compared to a couple hundred billion of Greek sovereign debt that needs to be restructured and that 3.2 billion is actually the aggregate for all players in the CDS market so the exposure of individual institutions is smaller and in fact that exposure itself of individual institutions would be marked to market i.e. discounted to market value and collateralized so further reducing the risk to the individual market participant and then you would even need to deduct from those figures the recovery value of the debt unless Greek debt actually goes to zero in a subsequent default so the actual amount of risk faced by participants in the CDS market is actually quite small so it is really unlikely that the ECB is significantly adapting its behavior out of some need or desire to protect a small number of CDS protection sellers at least that's his dispute but it seems reasonable to me so the real causes of the sovereign debt crisis is perhaps not naked speculation but over borrowing sovereign governments based on unrealistic assumptions about growth perhaps reduced receipts due to the banking crisis and the general economic problems that followed that endemic corruption seems to be an issue in some countries I won't name any specific countries but I suppose it's something that happens all over the world so now maybe just draw some quick conclusions before before hopefully we'll have a bit of a discussion I said that Buffett Warren Buffett talked about derivatives being you know weapons of financial mass destruction and the weapon analogy is often often used in relation to derivatives and that puts me in mind of section 11 of the Prevention of Crime Act 1953 which provides that a person without lawful authority or reasonable excuse is committing an offence if he has with him in a public base, without lawful authority or reasonable excuse, any offensive weapon and there are three categories of offensive weapon there's a weapon that's offensive per se such as a knife or a gun there is an object that's adapted for use as a weapon such as a sharpened stick often those two categories are more or less the same or very close, closely related there's a third category of an article carried by a person who intends to use it that is not normally used as a weapon but the person carries it intending to use it for the purpose of causing injury now I would argue that by analogy derivatives are certainly not offensive per se but by implication I suppose I'm suggesting that derivatives can be used for harm actually I don't really much like that weapon a metaphor though so the metaphor I tend to use is that of a hammer a hammer can be used to build something or it can be used to kill someone and I think hammers are much more often used to build things than to kill people but the key point is that it's a tool it has no derivative has no intrinsic moral quality now we haven't had time to discuss all the various good uses to which derivatives can be put huge volumes of derivatives that are done particularly interest rate and currency derivatives suggests that there is a serious economic utility to these transactions and ensuring efficient allocation of risk in the financial markets so needless to say my view is that at least one solution to the problems that derivatives raised for financial markets that should be off the table is banning derivatives entirely I think that solution should be off the table and that's not merely my view just a couple of weeks ago John Walsh who's the head of the US office for the controller of the currency warned against overreaction so this is one of the chief US banking regulators warned against overreaction and misperception surrounding the risks of derivatives which he feels could lead to harmful changes to the financial system that would actually be detrimental to market safety and soundness so I think there is the danger partly because people actually don't know what a derivative is really of overreaction and calling derivatives weapons of financial mass destruction raise a motion and I think don't help in that debate I've attempted to at least give you my practicing lawyer's view of derivatives in the financial crisis and I've not tried to talk about solutions but I thought we might talk a bit about solutions in the Q&A or how we get rid of the negative aspects of derivatives if we can or at least minimise them while preserving the positive aspects but we can indeed open to questions or indeed talking about any other aspect of the financial crisis so that's where they all want to stay on the main topic