— Proposed new regulation for derivatives market is expected to be formally release mid-month
Earlier this week, at a Senate Agriculture Committee hearing, CFTC head Gary Gensler, announced his proposed plan for changing the way the derivatives market and its participants are to be regulated. The details of the final regulation plan will be formally announced later this month.
Gensler’s regulatory outline imposes new requirements on the dealers as well as new rules regulating the entire derivatives marketplace in order to prevent another global market upheaval and create more transparency derivatives business.
More specifically, the proposed changes call for new capital and margin requirements and additional rules on reporting standards and business conduct. Gensler’s proposal also calls for ‘standardized’ derivatives to be cleared through a central clearinghouse. It is unclear how a ‘standardized’ derivative would be defined though volumes and clearinghouse acceptance of specific instruments would play a part in the categorization.
Naturally, not everyone is in agreement that the CFTC’s proposal for new regulation, which will formally amend the Commodity Exchange Act, is going far enough in its oversight and monitoring of this OTC derivatives market.
Senator Harkin (D-Iowa) is one such Congressman that believes the proposed regulatory plan falls short. Harkin has suggested that he sees no reason why all derivatives instruments cannot be cleared via a centralized clearing house (see speech). Such assertions were also made by Colin Peterson (D-Minn) when pushing the Peterson bill, a bill which called for mandatory clearing of credit derivatives.
On the opposing side however, market participants warn against over regulation of derivatives and how it would impede the use of these instruments to hedge risk and consequently greatly diminish profits for many financial institutions.
Even the exchanges, who are major beneficiaries of the central clearing of CDSs, warn that the market participants should have more say in how the OTC market should be changed and how far regulation should go.
In an FT article, some exchanges warn that regulators and legislators dare not push too much of the OTC derivatives markets into central clearing. Executives from the top players including ICE and NYSE Liffe caution that clearing houses cannot manage the clearing of more complex instruments as they are not equipped to manage the risks associated with them. Centrally clearing derivatives may be a more transparent method of clearing these instruments, but the risks of inherent in these instruments remain and are merely re-dispersed via the central counterparty.
Developing a central clearing infrastructure for OTC credit derivatives was a goal outlined by the Operations Management Group (OMG) last year in its letter to the international regulators. This group, in addition to other industry groups including ISDA, through the ISDA Board Oversight Committee (IBOC), the Managed Funds Association (MFA) and the Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA), sent the third letter to the NY Federal Reserve Bank.
This third letter and outline of the OMG commitments reiterates the goals met and expands the commitments to include more specific goals with aim to increase efficiency and reduce risks in OTC derivatives industry. All these groups are collectively working to get more participants involved in these commitments and onboard for changes and to do this ISDA, through the ISOC, plans to establish a more ‘inclusive industry governance structure,’ including a collection of steering committees and implementation groups.
So the question comes up again – is the industry already tackling the inefficiency of the OTC derivatives markets or a more sweeping regulatory overhaul take over? I know which option I’d prefer.