NEW YORK — Welcome to derivatiViews, a new weekly feature of the website which we will also email to our membership. It’s intended to be an informal comment on important derivatives issues. We hope it will be informative and easy to read, make good common sense — and prove to be controversial at times. Whatever their topic or tone, Views will be consistent with our long-held commitment to make the derivatives market safer and more efficient. In this first edition, we focus on global regulatory reform.
Going back to 2009 in Pittsburgh, the G-20 pledged to work together on several initiatives to foster safe, robust financial markets. Clearinghouses would be used to clear standardized derivatives and such contracts would be executed on exchanges or electronic trading platforms where appropriate. All contracts would be reported to trade repositories. Implementation would be monitored to improve transparency, mitigate systemic risk and protect against market abuse.
It’s important to note that these pledges did not mandate that all execution go onto exchanges or exchange like facilities. Rather, the G-20 stated that execution should go onto electronic platforms “where appropriate.” Unfortunately, legislation has been passed that goes beyond the G-20 commitments. The Dodd Frank Act (DFA) has mandated that swaps that must be cleared must also be executed on swap execution facilities provided they are capable of being traded. This “G-20 plus” portion of DFA has meant that rules for an entire marketplace need to be fashioned from scratch and, amazingly, put into place within a year — at the same time as the G-20 safety and soundness commitments must also be put into place.
ISDA believes that clearing improves the safety of the marketplace, provided the clearinghouses themselves are conservatively structured, managed and regulated. Reporting trades to regulators through trade repositories also improves the market’s safety. These safety and soundness issues are the key objectives of the G-20 commitments and they ought to be put in place before additional changes are made and mandates imposed. We realize, of course, that legislation has been passed and laws must be implemented. But let us look at what has occurred. Legislatures and regulators globally are all devising separate laws and rules to cover all the G-20 commitments at the same time. The result may be a plethora of clearinghouses and trade repositories, overlapping jurisdictional claims, and, now, a host of market structure issues that have little, if anything, to do with safety and soundness. The result has been an inordinate amount of effort by regulators and market participants and insufficient progress on safety and soundness issues. We wrote recently to US Treasury Secretary Geithner and EC Internal Markets Commissioner Barnier raising just these points.
We think there’s a better way. Global regulators should first agree on rules for clearing and clearinghouses and for trade repositories and focus on no other tasks until this is done. It might be a better way to make the markets safer and more efficient, something ISDA has been working on for 26 years.
What do you think about this issue? We encourage members to email us at derivatiViews@isda.org with their reactions to each View and to suggest new issues that might benefit from analysis and comment. Finally, while Connie or Bob will author most pieces, we do envision having guests write Views from time to time.