Financial Regulation, the Pessimistic View
Satyajit Das, who knows more about derivatives than I know about anything, has a guest post on naked capitalism about derivatives regulation. The quick summary? Don’t bet on it.
“‘Holy water’, ‘hosanna’s’ or other utterances (based on particular religious convictions) will be sprinkled or said in the form of initiatives to improve disclosure, increase capital and a new centralised counterparty (’CCP’) to reduce the risk of a major dealer failing. Fundamental issues – the use for derivative for speculation, mis-selling of instruments to less sophisticated market participants, complexity, valuation problems – will not be substantively addressed.”
In particular, Das points out that the industry is already aiming to weaken what regulations Treasury has proposed, including centralized clearing of standardized derivatives.
“On 17 September 2009, Robert Pickel, ISDA’s CEO, argued before the U.S. House Agriculture Committee: ‘Not all standardized contracts can be cleared.’ He argued that that even if they have standardized economic terms many derivatives contracts will be ‘difficult if not impossible to clear’ because the CCP depends on such factors as liquidity, trading volume and daily pricing. This would, Pickel argued, make ‘it difficult for a clearinghouse to calculate collateral requirements consistent with prudent risk management.’
“Dan Budofsky, a partner at Davis Polk & Wardwell LLP, who testified on behalf of the Securities Industry and Financial Markets Association, agreed that ‘it may be more appropriate for products that trade less frequently to trade over-the-counter.’”
How these debates work out will depend on a few Congressional committees and the regulatory agencies that end up writing the actual rules. That’s why it is important for these debates to happen in the full glare of public attention. Unfortunately, public attention has moved on, which is exactly what the industry is counting on.
By James Kwak