US Treasury Secretary Timothy Geithner said this week he wants new global standards governing derivatives trades. Essentially, if major global financial centers are singing from the same regulatory hymnal, regulatory arbitrage opportunities go away. But, US regulators are pushing for reforms well in advance of Europe. File this one under the “We really should have thought this through” category.
“Just as we have global minimum standards for bank capital—expressed in a tangible international agreement—we need global minimum standards for margins on uncleared derivatives trades,” said Geithner to the International Monetary Conference this week in Atlanta, according to a report in The Wall Street Journal.
As US regulators have been pushing to implement new regulations governing the over-the-counter derivatives (OTC) provisions of the Dodd-Frank Act (DFA), the Group of 20 industrial and developing nations have set December 2012 as its deadline for OTC reforms.
At the same time, Republicans want to push back the July deadlines and perhaps kill reform in the meantime. Fighting back, the regulators and Democrats want to forge ahead and disregard the legitimate worries of investors, the buy side and other market participants. This is yet another case of extreme partisanship breeding stupidity and paranoia on both sides of the aisle—to the detriment of the markets.
Somewhere along the way, major players forgot that the $600 trillion OTC market is global and investors and other market participants will shop around for the regulatory environment that is the most favorable to them.
It’s hard to connect the dots on this one but Geithner’s comments might be Treasury’s way of saying it’s okay to delay things to prevent what could be a disastrous OTC surge away from US markets. Better late than never, I guess.
In the meantime, Ken Bentsen, SIFMA’s executive vice president for public policy and advocacy, spoke in favor of the House Financial Services Committee proposal to extend the implementation date for the derivatives-related section of DFA.
“Dodd-Frank created a whole new regulatory structure for derivatives markets and it is vitally important to our economy that regulators get this new structure and the underlying rules right,” Bentsen said in a statement. “While we remain committed to fully implementing the derivatives provisions in the Act, we believe that the current July 21, 2011 deadline does not provide adequate time for regulators to consider the critical issues related to this new regulatory system for over the counter derivatives markets.”
The delay would give regulators more time to draft rules, run a cost-benefit analyses and “consider the cumulative impacts of these rules on the market and how they would affect businesses and consumers,” Bentsen said.
Yet the Congress, regulators and Wall Street should have already been considering the ramifications, said Jamie Cawley, CEO of Javelin Capital Markets and co-founder of the Swaps and Derivatives Market Association (SDMA), which is pushing for centralized, open clearing for OTC derivatives, among other issues. “With AIG still fresh in our minds, and the systemic chaos that credit derivatives caused in 2008, any delay to the implementation of the DFA would be wholly imprudent,” Cawley says. “The market has had two years to prepare. The Commissions should begin to finalize rules and compel markets at their earliest convenience.”
For their part, the regulators want to stay on track although they acknowledge that some of the new rules and regulations will be late.
Luckily, there is still time for the politicians, regulators and market players to hammer out a sensible way forward and they should. Deadlines should not be based upon an arbitrary promise to deliver everything in a year but on global coordination, particularly with non-US financial centers. And, yes, the need for reform is painfully clear especially as double dip fears return.
The political bickering, confounded regulators, and overall market confusion helped pave the way for the first OTC derivatives debacle.
Have we failed to learn anything from the Great Recession?
Need a Reprint?
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