In testimony before the US Senate Subcommittee on Securities, Insurance and Investment of the Committee on Banking, Housing and Urban Affairs, Robert Pickel, Executive Director and Chief Executive Officer of the International Swaps and Derivatives Association, Inc (ISDA), today addressed public policy considerations regarding the OTC derivatives business.
“The OTC derivatives business provides essential risk management and cost reduction tools for a broad swath of users,” said Pickel in his testimony. “ISDA and the OTC derivatives industry are committed to engaging with supervisors globally to expand upon the substantial improvements that have been made in the business since 2005. ISDA knows that further action is required, and pledges its support in these efforts.”
In his testimony, Mr Pickel outlined ISDA’s and the industry’s strong commitment to identifying and reducing risk in the privately negotiated derivatives business, emphasizing the following points:
* OTC derivatives offer significant value to the customers who use them, to the dealers who provide them, and to the financial system in general by enabling the transfer of risk between counterparties;
* ISDA recognizes that the industry faces significant challenges, and is urgently moving forward with new solutions;
* ISDA has delivered and is delivering on a series of reforms in order to promote greater standardization and resilience in the derivatives markets
* These developments have been closely overseen and encouraged by regulators, who recognize that optimal solutions to market issues are usually achieved through the participation of market participants;
* As ISDA and the industry work to reduce risk, ISDA believes it is essential to preserve flexibility to tailor solutions to meet the needs of customers. Efforts to mandate that privately negotiated derivatives business trade only on an exchange would effectively stop any such business from being conducted. Requiring exchange trading of all derivatives would harm the ability of American companies to manage their individual, unique financial risks and ultimately, harm the economy.
Last week, President Obama announced a comprehensive regulatory reform proposal for the financial industry. The proposal is an important step toward much-needed reform of financial industry regulation. The reform proposal addressed OTC derivatives in a manner consistent with the proposals announced on May 13 by Treasury Secretary Geithner. ISDA and the industry welcomed in particular the recognition of industry measures to safeguard smooth functioning of our markets.
The Administration proposes to require that all derivatives dealers and other systemically important firms be subject to prudential supervision and regulation. ISDA supports the appropriate regulation of financial institutions that have such a large presence in the financial system that their failure could cause systemic concerns.
Other issues raised in the Administration’s proposal have been addressed in a letter that ISDA and industry participants delivered to the Federal Reserve Bank of New York on June 2. The letter outlined a number of steps toward that end, specifically in the areas of information transparency and central counterparty clearing. (http://www.isda.org/press/press060209.html)
A complete transcript of Mr Pickel’s testimony is available at www.isda.org.