Asking the Hard Questions

This week we begin our series of annual update conferences in New York, followed by London next week and Sydney, Hong Kong and Tokyo in October. Here in New York we are honored to have CFTC Commissioner Scott O’Malia providing a keynote address. We will also be joined by University of Houston Professor Craig Pirrong, who will moderate a panel on clearing. He will do the same in London.

Commissioner O’Malia and Professor Pirrong consistently do what we aim to do with derivatiViews: ask the hard questions about the changes that are being put in place for the derivatives business.

When considering the pros and cons of any proposed rule before the Commission,  Commissioner O’Malia brings a consistent framework to his analysis:  What are the costs of the rule? What are its benefits? What will the effects of the rule be on the availability, liquidity and costs of these important risk management tools? And a favorite topic for him: does the CFTC have the resources, particularly technology, to carry out its mandate effectively? All excellent questions.

Even when a rule is final, Commissioner O’Malia continues to apply these benchmarks to his work. For example, the CFTC recently issued a final rule on the criteria for mandating clearing, which will be intertwined with the mandate for execution on swap execution facilities ( SEFs). He reached out to ISDA and others in the industry for input on a host of issues arising out of the rule. We provided that input to him last week.

Through his blog, Streetwise Professor, Professor Pirrong has regularly asked serious questions about the course of regulatory reform, particularly in the US but also globally. His study published earlier this year, The Economics of Central Clearing: Theory and Practice, has been downloaded thousands of times from the ISDA website, quickly establishing itself as the go-to guide for what clearing can and cannot do. The issues raised in that study will provide the framework for his panel discussions this week and next.

When it comes to Dodd-Frank the clearing mandate is not the law’s most problematic provision, according to Professor Pirrong. He reserves that position for the SEF mandate, although his description is, shall we say, a bit stronger. It so happens that we are also looking into the costs and benefits of mandating that whole categories of OTC derivatives be executed in one way. We plan to produce that analysis shortly and will no doubt highlight our conclusions in a future derivatiViews. We support the greater use of electronic execution, but believe that an execution mandate only works to inhibit customer choice. Unfortunately, the latest reports from Europe indicate that policymakers there are still considering a similar mandate.

We look forward to Commissioner O’Malia, his fellow Commissioners and Professor Pirrong continuing to ask the hard questions, and we hope that our efforts in derivatiViews will also add to the debate.

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