Duncan Lindo

Bio: Duncan Lindo is an academic researcher from University of Leeds. The author has contributed to research in topics: Derivatives market & Monetary policy. The author has an hindex of 3, co-authored 4 publications receiving 25 citations.

Libor 1986–2021: the making and unmaking of ‘the world's most important price’

Abstract: Up until around 2008 and the subsequent revelation of systematic manipulation, the integrity and ‘facticity’ of the London Interbank Offered Rate (LIBOR) were rarely questioned. Academics treated LIBOR and the Eurodollar market as if they were synonyms. Central bankers conducted monetary policy as if the LIBOR was an objective reflection of the money market rate. Corporates and households entered into LIBOR-indexed financial contacts as if a money market was the underlying benchmark. This paper investigates how and why LIBOR managed to maintain its status as a term for the competitive money market colloquially, professionally and in the economic literature for so long. By adopting a theoretical framework drawing insights from both political economy and sociology, and applying it to the LIBOR-indexed derivatives market, it is shown how the benchmark's appearance betrays its fundamental nature. This process benefits certain actors within the market: the banks. Importantly, however, it also reveals h...

Why derivatives need models: the political economy of derivative valuation models

Abstract: Derivatives markets continue to turn over enormous volumes and are an important part of financialised capitalism in the early twenty-first century. A surprising and yet key feature of these large and apparently liquid markets is that they seem to be bound up with the widespread use of mathematical valuation and risk management models by market participants. The paper investigates derivative models and risk management by highlighting the grounds for their emergence, their establishment and their influence on market developments. A political economy of derivatives markets provides insights into the essential nature of derivatives, defining them against the material circumstances in which they arise, and allows the logical development of valuation models and risk management as the necessary complement to the large-scale derivatives markets that have developed since the 1980s. The paper builds from finding prices for potential new trades to valuing completed trades and risk managing portfolios to show how and why valuation models and risk management are bound up with today’s derivatives markets.

The LIBOR eclipse:political economy of a benchmark

Abstract: Up until around 2008 and the subsequent revelation of systematic manipulation, the integrity and ‘facticity’ of the London Interbank Offered Rate (LIBOR) were rarely questioned. Academics treated the LIBOR and the Eurodollar market as if they were synonyms. Central bankers conducted monetary policy as if the LIBOR was an objective reflection of the money market rate. Corporates and households entered into LIBOR-indexed financial contacts as if a money market was the underlying benchmark. This paper investigates how and why the LIBOR managed to maintain its status as a term for the competitive money market colloquially, professionally and in the economic literature for so long. By adopting a theoretical framework drawn from both Political Economy and Sociology, and applying it to the LIBOR-indexed derivatives market, it is shown how the benchmark’s appearance betrays its fundamental nature. This process benefits certain actors within the market: the banks. Importantly, however, it also reveals how the LIBOR became, and remained, such an important benchmark and how it came to be perceived as an ‘objective fact’.

Capitalism with Derivatives: A Political Economy of Financial Derivatives, Capital and Class

Abstract: labour lying idle so that its form (gold) can symbolically play the role of the equivalent form of value. Distinctly capitalist commodity money would be a living part of accumulation, not a congealed, dormant, labour numeraire! How is this problem to be framed within Marxist theory? As well as money being a produced commodity like other commodities, it has to be a commodity that can guarantee value, but without reliance on the imprimatur of the state. This money commodity has to resolve temporal and spatial variability in value: it has to, in itself, resolve the problem of conventional state money, that a process of exchange of equivalent values is always expressed at a given time and in a given monetary unit. For conventional state money, this means that there are volatile exchange rates and a range of interest rate regimes for each currency: the equivalence of exchange cannot be verified. There is, in Marxist terms, a spatial and temporal problem in the commensuration of value: there is a discontinuity in the measured value of capital in different forms and at different locations, and this discontinuity needs to be reconciled.23 The new commodity money has to have the capacity to absorb that discontinuity into itself as (one of) its defining characteristics, so that money can, indeed, secure equivalence (commensurate value) across time and space. This process of commensuration is what Marx attached to the function of money: money is the means by which ‘[different] commodities become magnitudes of the same kind, of the same unit, i.e. commensurable’ (Marx 1939: 143). But how different moneys are commensurated within a theory of value, and what it means to commensurate packages of financial assets whose underlying value is not itself being exchanged were questions not posed by Marx, nor since Marx. It is this issue that brings financial derivatives to the centre of a Marxist theory of capitalist money. Marx’s theory of money: its link to financial derivatives The investigation of the rudiments of a theory of money consistent with financial derivatives must look beyond the form of gold. It is to Marx’s earlier writings, particularly on alienation, that we look for conceptual propositions about the nature of money and finance.24 For example, reviewing James Mill’s Elements of Political Economy, Marx (1844) emphasised the importance of contingency in relation to ‘laws’ about money and the essential role of money as a mediating process. Here Marx goes on to explain the basic characteristics of capitalist money, and it warrants citing at some length: The essence of money is not, in the first place, the property alienated in it, but that the mediating or movement ... is estranged from man and becomes the attribute of money. ... The personal mode of existence of money as money – and not only as the inner, implicit, hidden social relationship or class relationship between New, Global, Capitalist Money 159 23 The concept of discontinuities is explored in detail in Chapter 7. 24 Marx’s writing at this time, being strongly influenced by Feuerbach, is drawing on parallels between money and religion and both as alienated forms of social relations. commodities – this mode of existence corresponds the more to the essence of money, the more abstract it is, the less it has a natural relationship to the other commodities, the more it appears as the product and yet as the non-product of man, the less primitive its sphere of existence, the more it is created by man or, in economic terms, the greater the inverse relationship of its value as money to the exchange value or money value of the material in which it exists. Hence paper money and the whole number of paper representatives of money (such as bills of exchange, mandates, promissory notes, etc.) are the more perfect mode of existence of money as money and a necessary factor in the progressive development of the money system. In the credit system, of which banking is the perfect expression, it appears as if the power of the alien, material force were broken, the relationship of self-estrangement abolished and man had once more human relations to man. The important point Marx was contending above is that the more money is ‘lifted above’ direct commodity relations by ‘losing’ the characteristics of other commodities, the more ‘perfect its mode of existence’ because the social relations of capital, expressed in commodity production, are not being contaminated by the particularities of the chosen money commodity.25 Gold is, in this regard, an extremely primitive form of capitalist money: indeed, we know it historically as pre-capitalist money. Financial derivatives, on the other hand, as advances beyond promissory notes and bills of exchange – contracts that are man-made and having no ‘natural relationship’ to the products from which they derive, appear as a highly advanced form of money. Nonetheless, the requirement for a global monetary system is precisely as Marx conceived of it in the abstract – a role for commodities that are both part of other commodities, but also discrete commodities in themselves. But gold is a single (or at best dual) dimensional commodity.26 There are too many types of discontinuities in the global financial system to be reconciled by a single commodity in the role of money. The multiple forms of risk-exposure, reflecting the range of possible inter-temporal, inter-spatial, inter-financial-instrument price relativities requires intermediation in a form that is itself flexible and able to reflect the range of possibilities in these relativities. Gold does not meet this requirement, especially in an era when money capital increasingly takes the form of different types of credit money and other financial assets. Derivatives, on the other hand are commodities produced and traded for precisely this purpose. Derivatives: commodities commensurating monetary discontinuities We have seen that, in terms of Marx’s benchmark of the ‘progressive development of the money system’, derivatives meet the requirement of a more ‘perfect mode 160 Capitalism with Derivatives 25 Notice also that Marx could contemplate an association of ‘perfect money’ with something as basic as the credit system and paper representations of money. That now seems a rather low bar for depicting perfection. 26 The duality relates to Marx’s emphasis that gold never traded at its costs of production. of existence’ by being abstracted from ‘a natural relationship’ with other commodities. But are derivatives themselves commodities, and how can Marx’s conception of money reconcile the need for commodity money, yet for commodity money to appear as ‘not the product of man’? Marx’s conception of commodity money was both advanced and constrained by the Gold Standard within which it was conceived. It was advanced by recognition that money must have a commodity basis if it is to be an integral component of capital accumulation and not just a numeraire. But Marx’s conception was also constrained by the then widely held belief that one commodity, gold, could act as a universal equivalent form of value and furthermore, that the robustness of its status resided in its defined and finite quantity. In Marx’s time, the expectation was that one particular commodity (gold) could traverse and reconcile all the discontinuities within the money system. Derivatives, however, confront that image. Any single unit of measure such as gold can represent only a balance of multiple processes of commensuration, and thereby actually reconcile perhaps none at all. Derivatives, on the other hand, are literally thousands of types of commodities whose specific characteristics are designed to secure commensurability between different forms of capital and their spatial and temporal characteristics. If money is defined by its role in the process of commensuration (or, as Marx also put, it in the ‘mediating’ process), there is no logical preclusion that a range of ‘commodities’ could not fulfil the function of the equivalent form of value when there are clearly articulated mechanisms of commensuration between the various monetary commodities. New, Global, Capitalist Money 161

From dissonance to resonance: cognitive interdependence in quantitative finance

Abstract: This study explores the elusive social dimension of quantitative finance. We conducted three years of observations in the derivatives trading room of a major investment bank. We found that traders use models to translate stock prices into estimates of what their rivals think. Traders use these estimates to look out for possible errors in their own models. We found that this practice, reflexive modelling, enhances returns by turning prices into a vehicle for distributed cognition. But it also induces a dangerous form of cognitive interdependence: when enough traders overlook a key issue, their positions give misplaced reassurance to those traders that think similarly, disrupting their reflexive processes. In cases lacking diversity, dissonance thus gives way to resonance. Our analysis demonstrates how practices born in caution can lead to overconfidence and collective failure. We contribute to economic sociology by developing a socio-technical account that grapples with the new forms of sociality introduced by financial models - disembedded yet entangled; anonymous yet collective; impersonal yet, nevertheless, emphatically social.

Steering capital: the growing private authority of index providers in the age of passive asset management

Abstract: Since the global financial crisis, there is a massive shift of assets towards index funds. Rather than picking stocks, index funds replicate stock indices such as the S&P 500. But where do these in...