NEW YORK - The head of the Commodity Futures Trading Commission declared Wednesday that the time has come to bring the benefits of a central marketplace to the over-the-counter derivatives market, warning that the U.S. could see a repeat of the financial crisis if risks are not reduced and transparency improved.
In remarks prepared for the Council on Foreign Relations in New York, Gary Gensler, chairman of the CFTC, said it is "essential" that the government take significant steps to prevent the next crisis.
He lamented the fact that despite the astronomical growth in size of the OTC derivatives market -- with a notional value of more than $300 trillion in the U.S. -- it remains unregulated.
Even with the recent crisis having eased and banks repaying government aid, Gensler said, "I believe that we still must enact regulatory reform to promote transparency and reduce risk in the evolving over-the-counter derivatives markets."
This is based on Gensler's belief that "over-the-counter derivatives were at the heart of the crisis."
He argued for a move away from dealer-dominated transactions, saying that with OTC derivative contracts becoming much more standardized, "the time has come to bring the benefits of a central marketplace that lowers risk and allows market participants to see how contracts are priced."
Referring to risk as "like a spider's web that spreads throughout the economy," Gensler said bringing transparency to the over-the-counter derivatives markets shifts the information advantage from a small group of derivative dealers on Wall Street to the broader market.
"This not only benefits end-users, but increases competition in the markets by lowering the barriers to entry for additional market makers and liquidity providers," he said.
Making the case for central clearinghouses for OTC derivatives, Gensler said it would ensure that the failure of one party in a transaction does not harm its counterparties and the wider financial system.
Such a risk must be reduced, he said, "Otherwise, we could see a repeat of the financial crisis as the risk is externalized and the taxpayers are left on the hook."
Gensler acknowledged that the regulatory reforms being proposed would mean big changes for Wall Street, but added that the interests of Wall Street are not always in line with those of the American public.
It is time, he said, to change the way these markets function and the way they are regulated to benefit the public and to protect the American taxpayers.
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