UPDATE: Shared Oversight Of Derivatives Market 'A Mistake' -Survey

Market participants remain wary of plans by U.S. regulators to share supervision of the over-the-counter derivatives market, with a new survey citing divergent practices pursued by stock and futures agencies.

Nearly 60% of asset managers, broker-dealers and clearinghouses said that joint custody of swaps markets would be "a mistake" because of long-standing differences in the oversight approach of the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The U.S. Senate and House of Representatives both have passed financial regulation bills containing a slate of new rules for the $615 trillion over-the-counter derivatives market, with oversight shared between the two agencies depending upon product type.

The survey, conducted by Bank of New York Mellon Corp. (BK) and consultancy Tabb Group, identified a consensus about the regulatory and legislative fixes aimed at off-exchange derivatives trade, which has shouldered blame for deepening the financial crisis in 2008.

OTC derivatives include complex and customized financial instruments such as credit-default and interest-rate swaps, which are traded privately between parties as a means to tailor hedges to specific risks.

The market has been a key profit center for derivatives dealer banks that arrange the transactions. But the financial crisis exposed high levels of credit risk tied to the products, which are now targeted by a raft of overhauls.

However, banks and investors remain apprehensive of still-hazy boundaries between the two main market regulators, and the different requirements they may apply to the market, according to Sam Jacob, managing director at BNY Mellon.

"Not all of that is clear in the minds of many market participants," Jacob said. He also noted concerns that the two bodies have not always worked "cohesively" in the past.

The SEC and the CFTC currently split authority over swap markets, each overseeing derivatives linked to markets they already regulate.

The CFTC handles interest rate- and commodity-linked swap products, as well as products tied to broad-based indexes. The SEC has derivatives linked to single securities, like credit derivatives linked to specific companies, as well as narrow-based indexes and bespoke options contracts.

The Federal Reserve has a role as the regulator of derivatives dealer banks.

Language in the Senate's financial market overhaul package would also give the Fed jurisdiction over clearinghouses set up to handle OTC contracts, a provision the House of Representatives' version of the bill doesn't include. The potentially contentious issue is among those that must be resolved in a conference committee.

The survey said 79% of market participants agree that central clearing--the practice of posting collateral to a central repository to back up trades--will help reduce systemic risk in over-the-counter markets, even as three-quarters of respondents acknowledged the move would also reduce profits.

It also highlighted progress already made toward these goals, with most market participants already implementing recommended practices ahead of legislation.

Dealers banks have been moving toward central clearing of credit derivatives since mid-2008, driven in part by pressure from the Federal Reserve to revise antiquated back-office systems that relied on faxes and paper records.

The industry has cleared some interest rate-linked products for a decade through a service offered by London-based LCH.Clearnet Group Ltd.

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

(Sarah N. Lynch contributed to this article.)

CME (NASDAQ:CME)
Historical Stock Chart
From Jun 2024 to Jul 2024