September 28, 2010
Good afternoon. Welcome to today’s panel on trading and clearing in the off-exchange derivatives markets. I am honored to share the podium with our moderator, Jeremy Grant, and my fellow opener, Patrick Pearson. Jeremy has done some of the most in depth and consistent reporting on derivatives reform efforts. Patrick and I, as well as our staffs, have formed a true working partnership as both the European Commission and U.S. work to bring derivatives under regulation. I’d also like to thank each of the panelists for their insight during today’s panel.
In 2008, both the financial system and the financial regulatory system failed. Though there were many causes of the crisis, as evidenced by the $180 billion that U.S. taxpayers put into an ineffectively regulated AIG, derivatives did play a significant role. Over-the-counter derivatives – initially developed to help manage and lower risk – can actually concentrate and heighten risk in the economy and to the public.
In July, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which, importantly, requires standardized derivatives to be traded on transparent exchanges or swap execution facilities. These requirements are in addition to the required reporting of swaps transactions to swap data repositories and to regulators. Two weeks ago, the European Commission released its proposal on OTC derivatives, central counterparties and trade repositories. It is my understanding that the E.C. plans to address the public transparency requirement later when it takes up possible reforms to MiFID.
Transparent trading not only gives regulators a clear depiction of the marketplace, but it gives the public the many benefits of price discovery markets. The more transparent a marketplace is to the public, the more liquid it is, the more competitive it is and the lower the costs for companies using derivatives to hedge risk. Importantly, transparent trading also gives clearinghouses reliable pricing to best manage their risk.
In the U.S. we also have adopted a real time reporting requirement that says that the price, volume and other relevant characteristics on all swaps transactions will be reported as soon as technologically practicable after the swap is executed. This post trade transparency will provide additional market transparency to the public for both on-exchange swaps and those traded bilaterally.
Another area where the U.S. and Europe have a strong partnership is requiring clearing of standardized derivatives – those derivatives that Americans call “clearable” and that Europeans often called “eligible.” Both the Dodd-Frank Act in the U.S. and the EC’s proposal on OTC derivatives, central counterparties and trade repositories includes strong clearing requirements.
Clearinghouses in the futures markets – or what you may refer to on-exchange derivatives – have been around since the late-19th century. They have functioned both in clear skies and during stormy times – through the Great Depression, numerous bank failures, two world wars and the 2008 financial crisis – to lower risk to the economy. We both recognize the need for very robust risk management standards, particularly as more swaps are moved into central clearinghouses.
Even as both the U.S. and Europe have debated how to best balance lowering risk through central clearing with the concerns of corporate end-users of derivatives, we have come out quite similarly. In both proposals financial entities, such as swap dealers, hedge funds and insurance companies, will be required to use clearinghouses when entering into standardized transactions with other financial entities.
Before I turn it over to our moderator, I would like to again thank you for coming to this panel and I look forward to a vibrant discussion on some of the most critical reforms that we are bringing to the off-exchange derivatives marketplace.
Last Updated: January 18, 2011