13 January 2010

CFTC Gensler calls for comprehensive reform to the over-the-counter derivatives markets

It is critically important that we bring transparency to this market, CFTC Chairman Gensler said. Standard over-the-counter derivative transactions should be moved into well-regulated clearinghouses.

To reduce interconnectedness and lower risk in the system, standard over-the-counter derivative transactions should be moved into well-regulated clearinghouses, Gensler said. It is critically important that we bring transparency to this market, Gensler said, and the best way to bring transparency is through regulated trading facilities and exchanges, he added.

 

Data collected by the Bank for International Settlements indicates that though approximately 40 percent of over-the-counter derivatives are transacted between two reporting derivatives dealers, Gensler said.

 

In the opaque over-the-counter market Wall Street profits from the spreads between the bids and offers that are wider than they would be in a transparent market, Gensler remarks critically which would be in stark contrast with the regulated futures and securities markets, where the public can see the price of the last transaction traded on a regulated exchange as well as the latest bids and offers.

 

It would be like buying an apple from the supermarket when the price of the apple is kept private, he criticized. All transactions in standard contracts should be required to be conducted on regulated trading facilities or exchanges.

 

As regards to exemptions, it is the Wall Street banks that benefit from the so-called “end-user exemption” from transparency, not the businesses that use derivatives, Gensler said.

 

When it comes to clearing, Gensler said that today’s technology allows to separate transparency from clearing where the end-users can decide if they want to clear their transactions through a central clearinghouse or settle them on a bilateral basis with counterparties with whom they have established a credit arrangement.

 

The full speech is attached below

 

 

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