Opaque over-the-counter markets and flawed pricing schemes are
at the crux of the financial crisis, according to the chief
executive of Nasdaq OMX Group Inc. (NDAQ).
Central counterparty clearing - an area where Nasdaq has
ambitious plans to expand in 2009 - is one way to boost
transparency and mutualize risk in OTC markets, said Bob Greifeld,
CEO of the exchange said in a speech Thursday before the National
Press Club.
Greifeld told the audience that he believes there needs to be a
systemic regulator put in place, and he called for the merging of
the U.S. Securities and Exchange Commission and the Commodity
Futures Trading Commission. But he noted that any regulatory
changes must come from Congress, and he suggested that some of the
Congressional committees that cling fiercely to their jurisdictions
over the various regulatory agencies would have to loosen their
grip.
"We have different committees overseeing the different
regulators at this point in time, but in any crisis there are
opportunities to spring forward, and this is it," Greifeld said,
although he noted merging the two agencies is only part of the
solution.
To work toward reducing systemic risk in the over-the-counter
markets, Greifeld touted his company's own efforts through the
recent launch of Nasdaq's International Derivatives Clearing Group,
which clears and settles interest rate swap futures trades, as an
example.
"We are now moving to bring these values including transparency,
real valuations, and central clearing to the $400 trillion OTC
interest-rates swaps market - a market six times larger than the
credit default swap or CDS market," Greifeld said.
Nasdaq OMX owns an 80% stake in IDCG, which went live last week
after securing approval from the Commodity Futures Trading
Commission in December.
The platform's focus, interest-rate swap futures, mimic interest
rate swaps - private agreements to exchange streams of interest
payments on bonds or loans.
Nasdaq, which has additional plans to clear U.S. equities
trades, began work on IDCG in March 2008, following the collapse of
Bear Stearns Cos.
Other exchanges, such as CME Group Inc. (CME),
IntercontinentalExchange Inc. (ICE) and NYSE Euronext (NYX) have
developed platforms to clear OTC credit derivatives. At this point,
Greifeld indicated that credit-default swap clearing isn't in the
company's sights, and that Nasdaq prefers to focus right now on
interest-rate swap clearing because of the massive size of the
market.
Largely unregulated over-the-counter markets have shouldered
much of the blame for the credit crunch and ensuing financial
meltdown, and Greifeld shared this view as well.
"Throughout the economy, trillions of dollars in investment
instruments were never subject to the rigor of trading on a
transparent, well-regulated market," he said, pointing to flawed
pricing models and the complex nature of some OTC instruments as
distorting valuations.
Greifeld drew attention in his speech to what he called the
short-term nature of compensation in the financial sphere, where he
said executives were paid for transactions that had yet to fully
play out.
He was also highly critical of the SEC, saying it had pursued
"obscure business issues," but he was careful not to shoulder any
blame directly on Chairman Christopher Cox or accuse SEC staff of
taking missteps in failing to catch Madoff sooner.
He reminded people that "hindsight is always 20/20" and said the
whole thing is "still a mystery."
Madoff, who once served as chairman of Nasdaq, allegedly bilked
investors out of as much as $50 billion in a long-running
fraud.
In looking ahead toward fixing this crisis, he expressed
confidence in President-elect Barack Obama's team as it addresses
these issues, particularly plans for a new economic stimulus
package.
"This stimulus will serve as the starting gun for what promises
to be an uphill, marathon race to reinvigorate the American economy
and preserve American leadership in the world," Greifeld said,
although he declined to offer an opinion as to whether or not the
$750 billion price tag on the stimulus package is the right
amount.
"A balancing between spending and tax cuts in my personal
opinion is a good plan," he said.
In addressing the U.S. Treasury's Troubled Asset Relief Program,
he called attention to Nasdaq OMX's new Government Relief Index,
which will track the performance of companies participating in U.S.
financial rescue efforts.
"With this index, taxpayers and investors will be able to
measure the performance of companies participating in the
government's financial relief plan," he said.
But in terms of how the Treasury has used the rescue funds,
Greifeld was critical of some of the department's decisions - most
notably the auto industry rescue.
He said he felt there was too much "excess capacity" in the auto
industry, suggesting that throwing life lines to the companies may
not be worth it.
"Certainly I believe three is too many," he said of the three
Detroit auto companies. "Why would we be spending taxpayer money to
support all three?"
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117;
jacob.bunge@dowjones.com
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634;
sarah.lynch@dowjones.com
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