OTT over OTC?
Thursday 29 April 2010By EU Reporter Correspondents
As EU legislation to rein in the excesses of the financial sector draw closer, it becomes ever clearer that it’s not a simple task. At a public hearing on over-the-counter derivatives, organised by the European Parliament’s Economic and Monetary Affairs Committee, MEPs were reminded that derivatives were designed to mitigate risk, not for corporate gambling.
“Hedging creates certainty,” said Richard Raeburn, Chairman of the European Association of Corporate Treasurers. It was a message repeated by others, including Blythe Masters, head of global securities at JPMorgan, the woman accused by big-time investor Warren Buffett of having invented “financial weapons of mass destruction”. Ms Masters was the person credited with devising the sets of securitised assets that included sub-prime mortgage debt which, when it went bad, rendered the entire package worthless thus undermining inter-bank trust. She accepted that Mr Buffet had a point and admitted there were things she wished had been done differently. She was particularly critical of the “interconnectedness” of financial institutions and instruments that allowed the American insurance giant AIG to operate in an unregulated way, with those overseeing the overall market unable to see the consequences. “Having a central clearing system would have prevented it,” said Ms Masters. She favours mandatory reporting by end users of derivative products and powers for regulators to intervene. She was less keen on a much-touted demand for inter-operability. “It risks a race to the bottom in terms of regulation,” she warned, suggesting that all such derivatives would end up with the same level of protection as those products with the weakest rules.
Ms Morgan also said she favoured 100% transparency, but that may be harder to obtain; especially in the case of OTC derivatives, secrecy and privacy can be paramount, with corporate bodies keen not to release sensitive information, a point admitted by another speaker, Jon Eilbeck, Managing Director and Chief Operating Officer at Deutsche Bank.
Another problem that faces legislators is the risk that the EU and the United States may introduce legislation that could damage each other’s interests. US Treasury Secretary Tim Geithner has already warned that some measures contained in proposals on alternative investments like hedge funds and private equity that risk banning funds both based in and managed from third countries could spark a trans-Atlantic trade war. But Europeans are equally concerned with the so-called Volcker Act going through Congress, stopping banks from dabbling in markets on their own behalf, something that would severely hamper BNP Paribas and Deutsche Bank, to name but two.
“There’s a lot of political posturing going on at the moment,” said Richard Raeburn. He remains convinced that especially in the United States, politicians and legislators are playing to a public gallery still angry with bankers. But finding mutually acceptable rules the big-time players won’t be able to side-step will be difficult.