Reforming the Derivatives markets: EP committee quizzes major actors in the field
Specialists from the world of derivatives trading were on hand to discuss the steps ahead for better regulation with MEPs of the EP’s economic and monetary affairs committee on Tuesday. All recognised the risks such products pose and accepted that more transparency in their trading was necessary.
Questioned by socialist MEP Catherine Stihler about any regrets she may have regarding the way credit default swaps (CDS) had gone out of hand, Blythe Masters, JP Morgan’s head of global commodities replied, "There are definitely lessons that have to be learnt. I for one feel that I have learnt from that experience and there are things I may like to have seen done differently".
The public hearing was organised in the light of the current work the EP is undertaking on derivatives through the report of MEP Werner Langen (EPP, DE), due to be adopted in May.
Central clearing for transparency
The guests taking the floor during the public hearing argued in favour of replacing private party deals (over the counter dealing) with central clearing so that the price and volume of traded derivatives would be clearer to supervisors and regulators. Jon Eilbeck of Deutsche Bank however argued that in some circumstances the only way to protect from risks is though an over the counter deal. For this reason both systems had to coexist. Taking the floor on behalf of the end user companies of derivative products, Hakan Feuk from E.ON Energy Trading, claimed that central clearing should only be mandatory for deals between two financial institutions since this is where speculation can take place.
MEPs questioned the guests on the need to reform the management of central counterparties (CCPs), and the possibility of a distinction between real end users from speculative end users among other things. Henrik Paulsson of NASDAQ OMX, agreed that developing a new system of management for CCPs had to be an integral part of the new legislation. Blythe Masters argued that raporting should be mandatory for all transaction precisely to be able to catch speculative end users.
Greece, CDS, and overall level of derivatives
MEPs went on to ask about whether the situation in Greece would be the same had the derivatives in question been dealt with in the open and also whether issuers of CDS should provide impact studies regarding the effects of the CDS they issue. On a more general note, the question of rolling back the exponential increase in derivatives over the last decade was also raised.
In the chair: Sharon Bowles (ALDE, UK)
The public hearing can be viewed in playback here
