The Dodd-Frank law strives to increase transparency in derivatives trading by moving over-the-counter trading to exchanges, where prices and counterparty risk are easier to track. This provision has pluses and minuses for financial institutions. On one hand, funding the over-the-counter trading was expensive, so less of this sort of trading actually helps to free up capital. On the other hand, this business generated large revenues.
Our view is that many of the past problems with derivatives now targeted by regulators are less significant today. For example, exotic trading instruments like collateralized debt obligations (CDOs), which were at the center of the storm in 2008, no longer exist. Banks generally stopped creating these instruments in the immediate aftermath of the crisis. The market had effectively punished and all but eliminated certain products and practices that led to large and systemic losses. Banks’ derivatives exposure has ceased growing at the pre-crisis pace. A significant portion of the new regulations thus involve issues that pose little threat today.
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Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
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