Exchanges Offer Amendments To Obama Derivatives Plan
June 09 2009 - 3:09AM
Dow Jones News
Major derivatives exchanges intend to tell lawmakers Tuesday
they are generally supportive of the key concepts in the Obama
administration's plan to regulate the derivatives market. But some
still have reservations about imposing a government mandate on
clearing and exchange trading.
In prepared testimony before the House Financial Service's
Capital Markets Subcommittee, CME Group Inc. (CME) Executive
Chairman Terrence Duffy plans to suggest that the U.S. government
should incentivize clearing without forcing it upon companies. With
a mandate, he will warn, companies may simply move to a
less-regulated market overseas.
"Our support of central-counterparty clearing and opposition to
a government mandate is not inconsistent," he will say. "If the
over-the-counter dealers do not embrace clearing, they can easily
transact in another jurisdiction and cause significant damage to a
valuable domestic industry."
The Obama administration last month introduced a comprehensive
plan to shed more light on over-the-counter derivatives and the
firms that offer them. The proposal aims to avert another financial
crisis, which some believe was caused in part by large firms that
recklessly traded exotic financial products like credit-default
swaps out of regulators' sight.
The Obama plan would subject derivatives dealers to strict
capital and margining requirements and force them to report certain
data to regulators.
It would also force all standard over-the-counter products to go
through clearinghouses, which guarantee trades and soften the
market impact in the event of a default. Those standard products
would also need to be traded on exchanges in an effort to make
prices more transparent.
The proposal doesn't seek to force clearing and exchange trading
of customized products, but it would still subject them to
regulation by requiring data about the trades to be reported to
regulators. Companies like CME, IntercontinentalExchange Inc.
(ICE), NYSE Euronext (NYX) and others stand to gain financially
from the Obama plan, which would likely boost their volumes and
even give their clearinghouses a say over which contracts must be
cleared.
CME and NYSE both plan to offer clearing for credit-default
swaps, and a unit of ICE has already cleared over $800 billion in
credit-default swaps since its launch in March without a government
mandate.
But some exchange executives warned of any move that might kill
the over-the-counter market, such as one bill introduced by Sen.
Tom Harkin, D-Iowa, which seeks to put all derivatives onto
exchanges. "Forcing all over-the-counter derivatives to be cleared
and traded on exchange would likely have many negative unintended
consequences for the markets as a whole," ICE Chief Executive
Jeffrey Sprecher plans to tell lawmakers. Sprecher's testimony
doesn't specifically address his views on a clearing mandate,
although the exchange has generally not supported any sort of
government mandate.
CME's Duffy plans to offer lawmakers Tuesday an alternative to
mandated clearing, saying instead the government should give
"favorable capital treatment to over-the-counter dealers that
clear."
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634;
sarah.lynch@dowjones.com
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