Derivatives Regulation Could Be Bonanza for Clearing Houses
January 25, 2010
Buy-side execution platforms such as TradeWeb and MarketAxess will register as SEFs and will also see volume grow, Tabb predicts.
With regulatory reform still undergoing major changes in the Senate, there are uncertainties about the shape of any final bill. Assuming that an OTC derivatives clearing requirement makes it all the way through Congress and is signed into law, will clearing of standardized derivatives accomplish the overarching objective of lowering systemic risk?
Some experts remain skeptical. John Chrin, a former managing director of JPMorgan Chase who is now executive-in-residence, global financial services at Lehigh University, does not believe the bill passed by the House goes far enough.
Chrin points out, for example, that customized derivatives contracts will not be covered. "Derivatives played a meaningful role in [the financial crisis]," he said in an interview. "Oversight has not been up to standard. The regulatory infrastructure has not been able to control the banks."
Chrin believes that Congress needs to pass a bill requiring clearing of customized as well as standardized derivatives. "We need to have an excessive amount of capital put against these contracts," he says. "There is not an incentive for the players to standardize the contracts. When they are not standardized, clients cannot see what is going on. In the House bill, the government will be missing something. There has to be a catch-all phrase that says that as these [customized derivatives] come up, they will be considered."
No matter what Congress does, regulators are likely to remain at a disadvantage as they struggle to bring transparency to this huge-and opaque-area of the market, one expert said. "I feel horrible in terms of what some people unwittingly bought," the derivatives executive said, on background. "Derivatives are truly a black box, and regulators are under-gunned. They have not been able to help."