The Department of U.S. Treasury is appealing to the derivatives industry to come up with instruments institutions could use to hedge the risk of financial losses associated with a terrorist attack. Wayne Abernathy, assistant secretary for financial institutions at the U.S. Treasury, issued the call. "The government is asking us to do more swaps," said Blackbird Holdings' CEO Mark Brickell, who was moderating a panel session with Abernathy. "Who will fulfill their patriotic duty?"
The answer, at least according to a straw poll at the conference, is no one just yet.
There are too little data and the risks were not clear enough to write derivatives contracts on terrorist events, according to Ernest Patrikis, ISDA board member and senior v.p. and general counsel at American International Group. Eric Hiller, chief strategist in global derivative products at Bank of America, agrees. "It is almost impossible to quantify the risks," he noted.
In addition, bankers and lawyers said it would be extremely difficult to draft a contractual definition of a terrorist attack, establish a trigger event and even if it did get off the ground, accounting would present a thorny problem.
"I'd like to see the amount of regulatory capital you'd have to put behind that!" exclaimed one lawyer.