Regulatory Reform Summit 2011
July 13, 2011
- Highlights - Regulatory Reform Summit: Dodd-Frank Impact Analysis
OTC Derivatives: A New Paradigm
Title VII represents a paradigm shift in the way market participants, buy and sell-side, dealers and end-users, will be able to utilize derivative products to manage risk and execute investment strategies. The impact of this shift will be far-reaching, as firms will have to make dramatic changes to their infrastructures. The panel represented a number of interests in the derivatives markets where perspectives were offered from the view of brokers, operators of trading platforms, and end-users.
Don Thompson, Managing Director and Associate General Counsel for JPMorgan Chase, began the discussion by stating that with many rules implementing Title VII of the Dodd-Frank Act not yet finalized, and regulators moving in different directions with regard to certain provisions, the financial industry continues to experience uncertainty over pending rules that will affect their businesses.
All of the panelists agreed on the need for certainty and stressed that any new rules must be aligned with international standards so as not to facilitate regulatory arbitrage. New derivatives regulations should build in flexibility in order to ensure the greatest level of market participation and competition. The panelists all stressed that new rules cannot risk the global competitiveness of the U.S market.
The derivatives markets reflect one of the most pressing areas with a need for coordination across regulators. Multiple regulators have joint jurisdiction over the same derivatives markets and products, and some of these regulators have never been responsible for these complex products before. William Thum, Principal at Vanguard, affirmed SIFMA had played an integral role in developing comment letters on regulatory proposals that have helped to inform policymakers throughout the rulemaking process.
After discussing how the new Title VII regime will increase the standardization and clearing of derivatives contracts, the panelists were asked about the possibility that central counterparties (CCPs) could become a source of systemic risk to the financial system. Thompson said the potential did exist; he cited the intent of regulations to ensure appropriate capitalization of CCPs while balancing the need to ensure rules are not so onerous as to prevent new entrants into the market. Thompson also said that it was important for policymakers to recognize that certain Title VII provisions are in conflict.
SIFMA has long supported increased transparency in the derivatives markets, but there are concerns that some proposed regulations could limit the availability or increase the cost of these valuable risk management tools for American business, agriculture, and state and local governments. The regulators focused on the derivatives markets are under intense time pressure – if they need more time to review the impact their proposed rules would have and to get those rules right, they should take it. They should not rush to meet arbitrary deadlines.