Financial Regulatory Forum

ANALYSIS-Execs say US, EU swaps reforms bold but need work

October 23, 2009

    By Jonathan Spicer
   CHICAGO, Oct 22 (Reuters) – Exchange and clearinghouse operators, walking a fine line between regulators and customers, said this week new government plans to revamp global derivatives trading are bold but in need of serious revisions.
   Two U.S. House committees and the European Commission unveiled plans in the last eight days to revamp the $450 trillion market for private swaps, seen as the epicenter of the Wall Street meltdown and resulting economic crisis.
   Executives at a conference here applauded the progress and trans-Atlantic coordination on the reforms, which are expected to drive significant business their way, but cautioned more time was needed to trim some overzealous measures that could choke markets and even set them up for another catastrophe.
   “On the one hand, you’ve got this tremendous windfall. On the other hand, it’s not an evolutionary process,” Jeffrey Sprecher, CEO of exchange and clearinghouse IntercontinentalExchange Inc <ICE.N>, said in an interview on Thursday.
   “Government to a certain degree is trying to fit square pegs into round holes,” he said. “It’s getting those details right where the concern is.”
   The industry is worried about forcing inappropriate swaps through exchanges and clearers, relying on clearing as a panacea for systemic risk and the possibility that U.S. and European rules will dovetail, creating a confusing global patchwork.
   Some executives also complained about specific details in U.S. drafts, such as the difficulty in giving some firms clearing exemptions and a requirement in the House Financial Services Committee bill to cap collective bank ownership of clearinghouses at 20 percent. [ID:nN21509815] [ID:nN22432542]
   Politicians and regulators want to tighten bank oversight by forcing them to use transparent exchanges and, in particular, clearinghouses, which would monitor the positions of companies trading “standardized” financial products, and protect them from the default of a major player.
   “Are we sure that (in) having central clearing we are not going to build some systematic risk by having a concentration of risk in one place? Nobody is talking about that,” Patrice Blanc, CEO of Paris-based Newedge Group, the world’s largest futures commission merchant, told the Futures Industry Association conference.
   Roger Liddell, chief executive of LCH.Clearnet, Europe’s top independent clearinghouse, said in an interview: “There needs to be more focus on how different asset classes would behave and could be unwound in the event of a crisis,” after noting earlier on Thursday that too many rules would stifle activity.
   “The assumption that if something can be cleared, it should be put on an exchange can be a dangerous assumption.”
 
   MISSTEPS AND UNINTENDED CONSEQUENCES
   The two U.S. bills will be merged in a wider financial reform package that the House of Representatives is expected to vote on early next month. Any European Commission proposals need approval from the European Parliament and EU states.
   Many executives interviewed said regulators were taking the necessary time to wade through complicated issues, now more than a year after the collapse of Lehman Brothers Holdings Inc <LEHMQ.PK> and near-collapse of American International Group Inc <AIG.N>, both of which had dangerous exposure to credit- default swaps.
   “We’re really in the world of unintended market consequences right now. Misstepping with this would be quite severe for the end user,” Anthony Belchambers, CEO of London- based industry group Futures and Options Association, told Reuters TV.
   Craig Donohue, CEO of Chicago-based CME Group Inc <CME.O>, which runs a clearinghouse, but opposes government-mandated clearing, stressed an alignment of U.S. and European rules.
   “Almost all of the people who use these markets are people who can deal in Europe, the U.S., in Asia and other markets,” he told Reuters.
   If the rules are not aligned, he said, “people are simply going to traverse to the lowest common denominator from a regulatory perspective.”
   Broker dealers such as Goldman Sachs Group Inc <GS.N>, JPMorgan Chase & Co <JPM.N> and Citigroup Inc <C.N> dominate and reap big profits from the OTC derivatives market. Exchanges have long sought to win over more of the market, but they are also increasingly partnering with the banks, which have pledged to clear much credit and interest rate derivatives by year end.
   Thomas Book, executive board member at Deutsche Boerse AG’s <DB1Gn.DE> Eurex derivatives exchange, said “clear economic incentives” were needed to ramp up clearing.
   “I think we’d see a shift happening quickly if there were incentives,” Book said. “In the end there needs to be a market- driven solution as to what is cleared.”
 (Reporting by Jonathan Spicer; additional reporting by Doris Frankel) Keywords: DERIVATIVES REGULATION/ 
  
 ((jonathan.spicer@thomsonreuters.com; Reuters Messaging: jonathan.spicer.reuters.com@reuters.net))
Friday, 23 October 2009 00:04:58RTRS [nN22350197] {C}ENDS

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