Before revision: Regulators clearly believe that derivativescan never be risk free. Regulators have risk preferences and by imposing costly actions on banks they have made derivatives markets incomplete. These actions have idiosyncratic effects, for example the stress period for Market Risk capital is determined at the bank level, not at desk level. Idiosyncratic effects mean that no single measure makes assets and derivatives martingales for all market participants.
After revision: Regulations impose idiosyncratic capital and funding costs for holding derivatives. Capital requirements are costly because derivatives desks are risky businesses; funding is costly in part because regulations increase the minimum funding tenor. Idiosyncratic costs mean no single measure makes assets and derivatives martingales for all market participants.