Robert Pickel, executive director and chief executive officer of the International Swaps and Derivatives Association, Inc (ISDA) today offered the following comments at a US House of Representatives Committee on Agriculture hearing regarding proposed OTC derivatives regulation by the US Department of Treasury:
“Today, privately negotiated derivatives are widely used by American companies,” said Pickel in his testimony. “(W)e believe – and we are joined by thousands of American companies who also believe – that the customized nature of OTC risk management tools provides a substantial benefit…a benefit to our firms, our economy and our country. We must not lose sight of the important role that OTC derivatives play as we work together on financial regulatory reform.”
Pickel highlighted that ISDA and the privately negotiated derivatives business support many key public policy concepts contained in the Administration’s proposal. These principles include:
* Appropriate regulation for all financial institutions that may pose a systemic risk to the financial system;
* Stronger counterparty risk management, including clearinghouses;
* Improved transparency; and
* A strong, resilient operational infrastructure.
In regards to central counterparty clearing facilities, Mr Pickel added that more than $2 trillion of credit default swaps contracts have been cleared to date. And earlier this month, ISDA and 15 large derivatives dealers publicly committed in a letter to the Federal Reserve Bank of New York that the firms would submit 95% of new eligible credit default swap trades for clearing within 60 days by October 2009.
However, Pickel emphasized that there are certain aspects of the Treasury’s bill that work against its broad public policy goals, including:
· The scope of firms that would be subject to the legislation: The legislation’s definition of “swaps dealers” and “major swap participants” are overly broad and would include firms that are in no way systemically significant.
· The parameters for determining when an OTC derivatives contract is standardized: Both of the proposal’s methods need to be revised. The need for consistency amongst policymakers regarding what is standardized and what is not argues for broader participation by federal regulators in this process. And due to commercial considerations, the willingness of a clearinghouse to accept a transaction for clearing should not create a presumption of standardization.
· Mandatory clearing and exchange trading: Not all standardized contracts can be cleared. Contracts that are infrequently traded, for example, are difficult if not impossible to clear even if they contain standardized economic terms. As a result, clearing of OTC derivatives contracts should not be mandatory.
ISDA and its members believe that mandatory exchange trading should not be required in any circumstance. Mandating that OTC derivatives contracts trade on an exchange would undercut their very purpose: the ability to custom tailor risk management solutions to meet the need of end-users.
· Capital requirements for cleared swaps: ISDA and its members oppose this requirement because capitalization of the derivatives clearinghouse is designed to provide adequate protection to swap counterparties. In addition, the clearinghouse imposes its own layer of additional protection in the form of collateral requirements on its counterparties.
“These provisions would reduce or restrict the availability of customized risk management tools without contributing in any significant positive way to the Treasury’s goals of reducing risk and ensuring financial stability,” Pickel said. “As a result, they would make it more difficult for American companies to effectively manage their business and financial risks.”
A complete transcript of Mr Pickel’s testimony is available at www.isda.org.
