Geithner Urges Electronic OTC Derivatives Trading
By Matthew Leising and Tina Seeley
May 13 (Bloomberg) -- Treasury Secretary Timothy Geithner proposed requiring increased transparency in the over-the- counter derivatives market by making prices available on centralized computer platforms.
Increased regulation is needed to reduce risk to the financial system, Geithner said today at a news conference in Washington. He expanded on an approach laid out in March for more policing of financial markets as the worst credit crisis since the Great Depression caused more than $1.4 trillion in writedowns by banks and financial companies worldwide.
“Significant gaps in the basic framework of oversight over critical institutions” helped cause the financial crisis, Geithner told reporters. “A series of comprehensive reforms to create a stronger system, less vulnerable to crisis, with stronger protections for consumers and investors” will be hashed out with Congress, he said.
Electronic execution of trades including interest-rate and credit-default swaps would allow users of the financial instruments to get greater price transparency and make processing trades easier. Transactions in the $684 trillion over-the-counter derivatives market are now typically conducted over the phone between banks and customers.
Geithner was joined at the news conference by Securities and Exchange Commission Chairwoman Mary Schapiro and Michael Dunn, acting chairman of the Commodity Futures Trading Commission. The group pledged to work together to prevent regulatory cracks in the future.
The proposal sent to Congressional leaders has four main objectives: to protect against systemic risk by creating a more resilient market, improve efficiency and transparency, prevent manipulation and fraud and reduce risks to less-sophisticated investors, Geithner said.
Shares Rise
Shares of CME Group Inc. and Intercontinental Exchange Inc. rose after Bloomberg News reported Geithner’s plan. Chicago- based CME Group, the world’s largest futures exchange, soared $15.62, or 6 percent, to $274.10 as of 4 p.m. in Nasdaq Stock Market trading. Intercontinental of Atlanta, the second-largest U.S. futures market, rose 9 cents to $96.59 on the New York Stock Exchange.
“Anything that will bring transparency to this market will help the market, but the dealers who broker the deals would make less money,” said Paul Zubulake, a senior analyst with Boston- based Aite Group. “More transparency for the buy-side is less profit for the sell-side.”
Zubulake said any mandated changes “are not good for business in general.”
Once a Day
Only about 10 percent of bank customers use electronic systems to trade over-the-counter derivatives, Zubulake said. That compares with about 90 percent of inter-bank trades that are done electronically through inter-dealer brokers such as London-based ICAP Plc or Dealerweb, according to Zubulake.
Prices for indexes of credit-default swaps, contracts used to hedge against or speculate on corporate debt, have been made public once a day since March by Markit Group Ltd. and Intercontinental, the first company to guarantee the contracts with a clearinghouse. Prices for other over-the-counter contracts, such as interest-rate swaps, are not widely available.
“The migration of trading interest-rate and credit-default swaps to execution on electronic platforms would be a great step forward,” said Mark Yallop, chief operating officer of ICAP.
The need for transparency in the over-the-counter derivatives market was stressed by Theo Lubke, a senior vice president at the Federal Reserve Bank of New York, last month at a derivatives industry conference in Beijing.
More Information
Lubke, who was appointed in 2007 to oversee OTC derivatives by Geithner when he was president of the New York Fed, said the credit swap prices now available are not sufficient, according to a transcript of his comments.
Because investors don’t know when trades took place or how many occurred, more information is needed, he said April 23 at the International Swaps and Derivatives Association general meeting in Beijing.
“That window of opportunity to make changes as opposed to having those changes brought to the market by external forces is narrowing,” he said. “It is in market participants’ interest as well as the interest of regulators to see continued rapid movement.”
Interest Rates, Weather
Derivatives are contracts whose values are tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.
“ISDA welcomes the recognition of industry measures to safeguard smooth functioning of privately negotiated derivatives,” Robert Pickel, chief executive officer of ISDA, said in an e-mailed statement.
Lubke said at the ISDA conference that the major banks’ control of the over-the-counter derivatives market must end by allowing hedge funds and other investors more input into how market decisions are made.
“It is simply unacceptable in today’s environment that the design and structure of the OTC derivatives market can be controlled by a handful of large dealers,” Lubke said. “There is opacity in the OTC market that doesn’t have commensurate public policy benefits,” he said. “This is not something that can continue.”
Gensler Nomination
Congressional concerns about oversight of the derivatives market have led some to block President Barack Obama’s nominee to head the Commodity Futures Trading Commission, Gary Gensler. Gensler was involved in legislation that exempted these markets from oversight, a law that will be amended if these proposals are accepted.
“Today’s outlined proposal is a step in the right direction and a more substantial expression of commitment to regulatory reform than we have previously seen from the administration,” Senator Tom Harkin, an Iowa Democrat and chairman of the Agriculture, Nutrition and Forestry Committee, said in an e-mailed statement.
Harkin, whose committee oversees the CFTC, introduced legislation earlier this year that would require all over-the- counter derivatives contracts be traded on regulated exchanges. Harkin said in a May 4 interview that his measure is in opposition with Geithner’s position, which would exempt customized contracts from clearinghouses. |
