Securities are not derivatives

By Felix Salmon
June 1, 2009

The WSJ makes a good catch: the SEC — the agency charged with regulating securities but not derivatives — refers to securities as derivatives three times in a press release which came out last Thursday. This is typical:

Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office, added, “These brokers took customers primarily interested in protecting their money and pushed them into risky derivative investments through blatant misrepresentations.”

No, they were not derivatives, they were mortgage-backed securities, as the official complaint — which never uses the word “derivatives” explains.

When I’ve made this point in the past, invariably people have popped up in the comments saying that these securities can indeed be considered derivatives, for some recondite etymological reason. But really the line between securities and derivatives is quite easy to understand: derivatives are a zero-sum game, while if a security goes to zero, no one else makes a concomitant profit.

I do wonder, though, whether a lot of the animus aimed at derivatives comes from people who are using such a broad definition of the term that it encompasses mortgage-backed securities and other non-derivative instruments. Certainly it would be helpful if stories like this one were assiduous in defining their terms — I’m pretty sure it’s referring only to real derivatives and not to securitizations, but that’s a distinction which is evidently worth making explicitly. And it’s certainly a distinction which the SEC, of all agencies, should be hyper-aware of.

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