PrefBlog

Well … it looks like they’re coming. Accrued Interest will be happy.

Treasury today unveiled its new website, with a press release on the previously touted regulation of OTC derivatives:

Promoting Efficiency And Transparency Within The OTC Markets — To ensure regulators would have comprehensive and timely information about the positions of each and every participant in all OTC derivatives markets, this new framework includes: Amending the CEA and securities laws to authorize the CFTC and the SEC to impose:

• Recordkeeping and reporting requirements (including audit trails).
• Requirements for all trades not cleared by CCPs to be reported to a regulated trade repository.
• CCPs and trade repositories must make aggregate data on open positions and trading volumes available to the public.
• CCPs and trade repositories must make data on individual counterparty’s trades and positions available to federal regulators.
• The movement of standardized trades onto regulated exchanges and regulated transparent electronic trade execution systems.
• The development of a system for the timely reporting of trades and prompt dissemination of prices and other trade information.
• The encouragement of regulated institutions to make greater use of regulated exchange-traded derivatives.

Credit Default Swaps are not mentioned specifically in the press release, but clearly fall under the heading of “OTC Derivatives” and “standardized trades” … at least, the plain-vanilla ones do.

I think it’s a mistake. OTC markets reward those with a vague idea of what they’re doing; the transparency of an exchange gives incompetent advisors a free ride. On the bright side, it will at least dampen the endless whining for centralized bond exchanges that accompany every discussion of bond market reform … once Joe Retail sees that, for instance, a CDS on CM at 500bp with an end-date of April 10, 2013 traded 2 contracts last month and are quoted at a 200bp spread, perhaps he won’t feel so hard done by when looking at dealer quotes for his $5,000 lot.

No argument is presented in favour of the idea. The closest approach is the opening paragraph:

As the AIG situation has made clear, massive risks in derivatives markets have gone undetected by both regulators and market participants. But even if those risks had been better known, regulators lacked the proper authorities to mount an effective policy response.

… which, as I’m sure Geithner knows perfectly well is totally ficticious. It would have been the easiest thing in the world for the Fed to have altered bank capitalization rules (and for the SEC to have altered broker capitalization rules) to have required more margin (or capital charges in lieu thereof) for swaps.

In which case, AIG’s ability to sell uncollateralized protection to the financial system behemoths would have been sharply curtailed, and direct damage limited to non-regulated entitites. However, this would involve regulators ‘fessing up to inadequacy, which ain’t gonna happen.

This entry was posted on Thursday, May 14th, 2009 at 12:43 am and is filed under Regulation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.