On Pricing

I was at a dinner with someone who works for FINRA who expressed the opinion the one of the great deficiencies of the current regulatory regime was the fact that funds price CDS monthly instead of daily.

My response, which I think gets to the heart of the matter (putting aside whatever private counterparties do contractually), is imagine if, for whatever reason, you had to price your house by what you could sell it for today. That would produce an unreasonably low price. Its senseless to demand daily pricing in less the liquid markets.

Two thoughts on that conversation:

First, while we can all now agree that financial markets require sensible regulation, there is a obviously high cost to onerous+benefit-less regulation. There seems an unfortunate tendency amongst regulators -- personified by my fellow diner -- towards onerous+benefit-less regulation.

Secondly, I think this point -- the dependance of price on time -- is something that what I have seen of regulatory and risk management practices tend to ignore. Going forward, of course, they ought not, and it leads to some pretty interesting conclusions.

For example, a fund with daily liquidity, perhaps, might fairly be forced to price its portfolio by its daily liquidation value. But a fund with a stronger lock up, should be allowed to price its portfolio in a manner that reflects the longer time it has to cash out. Which would mean that the same asset, in the hands of two different funds, could be fairly priced dramatically differently.