In testimony before the US House of Representatives Committee on Agriculture, Robert Pickel, executive director and chief executive officer of the International Swaps and Derivatives Association, Inc (ISDA), today addressed the Association’s concerns regarding the Committee’s "Derivatives Markets Transparency and Accountability Act of 2009."
“It is worth noting at the outset that [OTC derivatives] markets have continued to perform their important risk management function during the current market turmoil," said Pickel in his testimony. It is our hope that policymakers will keep in mind the relative health of OTC derivatives throughout the market downturn as you consider measures which might profoundly change the way these markets function.”
Pickel emphasized that OTC derivatives serve a very valuable purpose: they allow companies to manage risks, such as interest rate risk, foreign exchange risk, commodity price risk and credit risk. The financial system and the economy as a whole are stronger and more resilient because of OTC derivatives.
Pickel outlined in his testimony the Agriculture Committee’s experience with OTC derivatives markets. The Committee has helped create a thriving, vibrant risk management industry which even today, amidst the global financial crisis, continues to employ thousands of US citizens and provide tax revenue to state and federal government.
However, Pickel said that portions of the Committee’s Draft Bill would severely harm these markets and prevent them from functioning properly in the United States while also impairing the ability of American companies to hedge their risks. More importantly, the consequences of certain provisions of the Bill would harm many mainstream American corporations.
Pickel stated that the Bill would make it unlawful to enter into a CDS unless the person entering into the transaction would experience a financial loss upon the occurrence of a credit event and that it would effectively eliminate the CDS business in the United States.
The effect of the Bill would be to severely limit the use of the hedge exemption and thus access to the futures markets. This would likely result in more costly hedging, increased volatility, reduced liquidity and a deterioration in the price discovery function of futures markets.
In addition, the Bill would effectively give the CFTC the authority to cancel private contracts. This fundamentally undermines legal certainty, would make it difficult for parties to calculate how much capital to hold against such contracts and would likely cause a significant decrease in OTC activity.
Pickel also highlighted that while clearing should be encouraged, and market participants should continue to work with federal and international regulators to create a viable clearing solution for OTC derivatives, he said that mandating clearing of all OTC derivatives is unwarranted.
Pickel concluded his testimony by stating that OTC derivatives markets play an important role in the US and world economy. OTC derivatives remain an essential element in returning the financial system to full health, and harming these markets is not in keeping with that goal.
A complete transcript of Robert Pickel’s testimony is available at www.isda.org.