The derivatives industry supports clearinghouses and data repositories that would make over-the-counter markets more transparent, but fears any efforts to regulate beyond this would be duplicative and costly, the head of the International Swaps and Derivatives Association told lawmakers yesterday.
ISDA chief executive officer Robert Pickel made the remarks in testimony before a hearing held by the House Financial Services Committee's capital markets panel. His remarks come as Treasury Secretary Timothy Geithner and Commodity Futures Trading Commission chairman Gary Gensler proposed a regulatory regime for derivatives dealers and the market that would differentiate to some extent between standardized products and customized products, such as municipal and other interest rate swaps.
However, Pickel suggested that ISDA would oppose any attempts by Congress to require standardized OTC products to be traded over an exchange, warning this "would not produce any additional information for or benefits to, policymakers." Instead, it could "increase the cost of doing business for industry participants" and "put American businesses at a significant disadvantage to their competitors around the world," he said.
Don Thompson, managing director and general counsel at JPMorgan Chase & Co., who represented the Securities Industry and Financial Markets Association, agreed with Pickel that information can be obtained from clearinghouses for standardized derivatives, and from data repositories for customized derivatives. The data repositories could provide aggregate market data, which would be available to the CFTC and the Securities and Exchange Commission. The two agencies could request more information if necessary.
Gensler has proposed customized derivatives be regulated through dealers, which would be required to meet capital , margin, business conduct, and recordkeeping and reporting standards.
The question before the Obama administration is to ask which OTC derivatives are customized, Pickel said. "That's something the administration is wrestling with currently," he said.
During the hearing, Republican committee members warned that too much federal regulation would endanger corporate competitiveness and move the derivatives business offshore, while Democrats generally expressed outrage over the derivatives crisis spawned by American International Group Inc. and called for reforms.
Subcommittee chairman Paul Kanjorski, D-Pa., said AIG's collapse demonstrates that Congress "must move the OTC market to one that happens out in the open."
But ranking member Rep. Scott Garrett, R-N.J., claimed regulatory failure contributed to AIG's failure "as much as anything" and said Congress needs to "guard against overly burdening regulations."
Kanjorski made a pitch for help from industry officials and other witnesses at the hearing, after acknowledging that committee members do not have any expertise in this area.
"Send us some of your suggestions for regulations or oversight," he said. "If you fail to do that, I think you can clearly see there are no derivative experts on the House Financial Services Committee, so we'll be operating blind."
When industry officials said they would gladly serve as advisers to the committee, he quipped: "Consider yourself drafted to the [derivatives] army."