Asking the Hard Questions, Part II

Yesterday, ISDA held its Annual New York Regional Conference, which we previewed for you in Monday’s derivatiViews. Commissioner Scott O’Malia of the US Commodity Futures Trading Commission provided the keynote address to the 250 members in attendance. ISDA Chairman Stephen O’Connor discussed the important challenges facing the OTC derivatives markets and ISDA’s approach to addressing them. It was, by all accounts, another successful ISDA event.

A consistent theme throughout the day was the need to assess whether the current pace and direction of regulatory reform in the US is taking the derivatives markets closer to the overriding goal of systemic risk reduction. ISDA supports this important goal, as espoused by the G20, and the industry’s progress in clearing, compression and trade repositories underscores its commitment to making OTC derivatives markets safer and more efficient.

Connie Voldstad’s remarks, which opened the event, sounded this theme. He noted that as the regulatory reform process unfolds and rules are implemented, we will know much more about what the reform initiatives will actually entail and what they will cost. As the industry puts these initiatives in place, this knowledge may result in the emergence of alternatives that more effectively reduce systemic risk.

He urged the industry and policymakers to be flexible in finding, assessing and adopting the best solutions and to avoid locking into one path that may ultimately prove less constructive than others. A case in point: given the costs and benefits of clearing vs. collateralization of non-dealer OTC derivatives transactions, it might be possible to mitigate their risk much more simply and effectively through collateralization provided it is completely standardized and overseen by an independent third party. This party could then affirm that all exposures are properly collateralized and provide counterparty exposure information to regulators. Concrete proposals on ideas such as this might come in 2012 or several years in the future.

Unfortunately, one press report coming out of the conference misconstrued Connie’s remarks to create a misleading and distortive headline that was completely out of context. The text of the speech is here so readers can access it directly.

One additional note about the conference: we were very pleased to have Professor Craig Pirrong join us to moderate a panel on clearing. Professor Pirrong, who is one of the foremost authorities on the subject, will also participate in our London conference next week. He’s chairing a panel on “Clearing: Challenges to Achieving Its Risk Reduction Potential.” Bob Pickel will address the conference in the morning and Connie will moderate a panel on “Front Office Visions of the Derivatives Future.” Other sessions will cover current regulatory, trading infrastructure and legal issues and developments.

We hope to see you there.

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