A group of international finance experts led by former Federal Reserve chairman Paul Volcker is calling for regulation of over-the-counter derivatives, improvements in credit ratings, and a reevaluation of fair-value accounting among its recommendations for financial regulatory reform.
Volcker chaired the Group of Thirty's steering committee that wrote the report, which includes 18 recommendations for possible regulatory reform under President-elect Barack Obama's administration.
The Group of Thirty is a nonprofit economic council headquartered here. Volcker will play a key role in shaping financial reform as chairman of Obama's Economic Recovery Advisory Board.
The economic crisis "has exposed serious shortcomings" in the OTC derivatives market, the report says. "Systemic disruption issues" and a lack of transparency demand greater regulation of the market, it says.
An "appropriate market regulator" should have authority to apply rules to the OTC derivatives market, the report says without naming a specific one. The report recommends large holdings of OTC derivatives be reported to the regulator as well as any large counterparty credit exposures held by institutions.
A "central counterparty clearing arrangement" should be encouraged, the report says. An OTC intermediary would be required to be regulated as a bank or would have to register with the regulator as a professional intermediary, it said. Futures and options exchanges including the Chicago-based CME Group Inc. and the Atlanta-based Intercontinental Exchange Inc. have expressed an interest in serving as an OTC derivative clearing party.
The report recommends that credit rating agencies modernize reports to include liquidity and price volatility factors as part of their ratings. It also recommends that the rating payment model be changed to eliminate possible conflicts of interest. Rating agencies are not currently liable for their assessments and should be held accountable for them, the group says.
The report recommends that money market mutual funds that want to offer bank-like services should be designated as "special-purpose banks" and regulated as such. Additionally, it says that fair value accounting principles and standards "should be reevaluated with a view to developing more realistic guidelines for dealing with less-liquid instruments and distressed markets."
