Friday, March 12, 2010

Wall St ‘allergic’ to OTC derivative reform

Original posted in the Financial Times by Jeremy Grant:

Wall Street is ”allergic” to proposed reforms to the vast over-the-counter (OTC) derivatives markets but regulators will continue to insist that use of such complex financial instruments be made more transparent to avoid another financial crisis, Gary Gensler, chairman of the US futures regulator, said on Thursday.

His comments are a sign that Mr Gensler, a former Goldman Sachs banker who is current chairman of the Commodity Futures Trading Commission, is attempting to ratchet up pressure on Wall Street to accept tighter regulation of the OTC markets amid intense lobbying from Wall Street to dilute the reforms.

US senators are finalising their version of a bill that would, as the CFTC has also insisted, mandate the shifting of as many OTC derivatives as possible onto exchanges. Dealers in the OTC markets are reluctant to see such products move on-exchange as they would lose control of a market they have long dominated.

Proposed reforms also call for OTC derivatives to be processed through clearing houses, which act as a guarantor that trades are completed even if parties to the trade default. Ordinary companies that use OTC derivatives – also known as ”corporate end-users” – argue they should be exempted from the reforms as they played no role in the crisis.

Mr Gensler told an annual Futures Industry Association conference in Florida that Wall Street had ”not been enthusiastic about this reform”.

He said that while there was ”broad consensus among Congress, the administration and many in the industry” that derivatives dealers should be ”comprehensively regulated”, Wall Street ”appears to be aligning themselves with corporate end-users in an effort to exempt customer transactions from central clearing”.

Mr Gensler said any exemption from a requirement to use cleared OTC derivatives should only apply to non-financial users of such instruments.

”Wall Street seems to be making the case that financial end-users also should be exempt. This could possibly leave 60 per cent of the clearable market outside of clearing,” he said.

Mr Gensler said that when it came to shifting OTC derivatives onto exchanges, ”they [Wall Street] appear rather allergic”.

However he added: ”After the worst crisis in 80 years, though, we need real reform that protects the American public. In 2008, the US taxpayers had to bail out these ’sophisticated’ market participants with their hard-earned dollars.”

Mr Gensler asked for a show of hands among bankers, traders and exchange executives in the audience if any believed OTC derivatives were not part of the crisis. No one raised a hand.

”I want to thank you for your unanimous support that something probably has to happen here [on reform],” Mr Gensler said.

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