Clearing OTC Trades To Make OTC Markets Safer - Nasdaq CEO
January 08 2009 - 1:35PM
Dow Jones News
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.
In a speech before the National Press Club Thursday, Greifeld
cited 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.
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 also drew attention 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 called for a restructuring of the United States' financial
regulatory framework, arguing that the SEC has pursued "obscure
business issues" while investors fell prey to the likes of Bernard
Madoff.
Madoff, who once served as chairman of Nasdaq OMX, allegedly
bilked investors out of as much as $50 billion in a long-running
fraud.
Greifeld pressed for a regulator with a broader mandate to
address systemic risk, and said it was "incomprehensible" that the
SEC and CFTC continue to operate separately when financial
instruments have blurred the line between markets.
He voiced 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.
He also drew attention to Nasdaq OMX's new Government Relief
Index, which will track the performance of companies participating
in U.S. financial rescue efforts such as the Troubled Asset Relief
Program.
"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.
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117;
jacob.bunge@dowjones.com
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