The Wholesale Market Brokers Association (“WMBA”), an independent industry body representing the world’s largest Inter-Dealer Brokers,* is reviewing the proposals for the regulation of over-the-counter (“OTC”) derivatives announced by Treasury Secretary Tim Geithner. It wishes to reiterate its support for efforts to clear credit default swaps (“CDS”) through a central counterparty (“CCP”) as well as other financial products that are suitable or relevant for clearing.
It expresses disappointment, however, that the US Department of the Treasury press release of May 13 2009 did not take into account the reality that most of the severe losses suffered by banks occurred in the structured credit markets and not in the OTC CDS market.
It is also concerned that some policymakers do not seem to acknowledge that making markets more secure can be achieved through the clearing of products through recognised CCPs. In this way, CCPs would clear for both OTC and exchange traded products alike. The implication being drawn by some market participants and commentators, is that the only way of achieving regulators’ ambitions is to coerce OTC products onto exchanges.
David Clark, chairman WMBA, said, “The WMBA wishes to warn again that forcing OTC products onto exchanges would significantly reduce liquidity in financial markets, resulting in increased risks and costs for end users as their ability to hedge their exposures would be handicapped.
“Such users include governments, municipalities, corporates, and banks and other financial institutions on a global basis. Whist the objective of making markets more secure is supported by all market participants, and certainly WMBA members, the unintended consequences of poorly thought through policy decisions would have a serious impact on the real economy.
“The WMBA believes that European initiatives indicate a firmer grasp of the essential role of the clearing house, and understanding of the transparency and post trade security inherent in the activities of banks, and WMBA members that use platforms that are MiFID compliant in an already regulated environment.”
