Financial crisis raises questions on credit derivatives: India

India today raised questions about various aspects of structured products and derivatives in the credit market, whose limitations have been brought to the fore by the ongoing global financial crisis.    

"The unfolding crisis has revealed the weaknesses of structured products and derivatives in the credit markets," RBI Governor D Subbarao said at the meeting of the International Monetary and Finance Committee here on Saturday.    

This throws up questions about the appropriateness of various structured products like credit derivatives and their financial stability implications, he said.    

"Are exchange traded derivatives superior to over-the- counter (OTC) derivatives? Do we need to focus on prescribing and instituting appropriate clearing and settlement practices even for OTC products? In what way can we eliminate the shortcomings of the 'originate-to-distribute' model?" he asked.    

According to analysts, the sub-prime crisis turned into a systemic risk in the US as original lenders to sub-prime housing borrowers sold their portfolio to other players, through complex derivatives. Therefore, it is not clear what would be the size of losses and which other firms would succumb to the financial meltdown.    

Last month, India's Chief Economic Advisor Arvind Virmani had said that the global financial crisis has a lesson for India that it should exercise caution in opening up derivative products and initially permit only those which are exchange-traded.    

"You have to be cautious. Say, for example, when derivatives are mentioned, the implication to me is that you should try and first open up derivatives which are exchange- traded because those are much more transparent," he had said.