Brussels, 17/03/2010 (Agence Europe) - Addressing MEPs on the European Parliament's Economic and Monetary Affairs Committee on Tuesday 16 March 2010, the chair of Commodity Futures Trading Commission (CFTC) in the US, Gary Gensler, called for a coordinated, international approach that covers the regulation of derivatives on the financial markets in as detailed a manner as possible. The market is worth some €4,400 billion a year, twelve times world GDP! Derivatives sold over the counter were at the heart of the 2008 financial crisis, he explained, pointing out that it had cost the US taxpayer USD 180 billion to bail out US insurance giant AIG, the biggest player on the derivatives market.
Expected to hit the statute books at the end of the year, the new round of legislation being pursued in the United States aims to regulate financial institutions investing in derivatives; ensure transparency on the derivatives markets by ensuring standardised derivatives are sold on regulated platforms; ensuring compulsory payment for standardised derivatives at central clearing houses (CCH); and restricting exemptions to standard contracts to derivatives not involving financial institutions. On the latter point, Gensler said that the best thing would to restrict the exemptions to no more than 9% of the markets for transactions by trading companies. He said it would also be best to avoid forcing CCH to operate in a specific geographical area, like the eurozone. He said that restricting the geographical area for paying for derivatives may increase risk and reduce efficiency in the allocation of capital. He called for transparency rules to be drawn up at international level to allow information to be shared among national supervisors.
CDS. In response to a question from UK MEP Arlene McCarthy and French Socialist MEP Pervenche Berès about credit default swaps (CDS), Gensler said he took a dim view of the idea of banning short selling on credit default swaps, preferring that this kind of deal, which has singled out as increasing the cost of the Greek government rolling over its sovereign debt, to be subject to suitable capital requirements to cover any sudden emergence of a default risk. Regulators should be able to restrict positions held on CDS and take effective action to prevent abuse of the market, he added.
Gensler held a meeting on Monday 15 March 2010 with EU Internal Market Commissioner Michel Barnier, who briefed MEPs and MPs at a hearing on Tuesday 17 March about the scam's work on financial regulation (see related article). The Commissioner said he would be unveiling general derivatives legislation in June 2010, adding that the G20 had made it clear that greater transparency, grater prudence and greater monitoring of derivatives were required, including CDS. The EU is aiming to make it compulsory for dealers to actually pay for standard derivatives on CCH and to register transactions in trade repositories. In parallel, he said that the Commission would be beefing up and making wider use of penalties in the financial industry for matters such as insider trading. He said that before the autumn, he would be unveiling legislation on short selling of CDS on sovereign debt.
Some three-quarters of all sovereign debt derivatives are reported to be sold on the London money markets, with the remaining quarter traded in New York. The five biggest sovereign debt CDS dealers are Deutsche Bank, JP Morgan, Goldman Sachs, Morgan Stanley and Barclays Bank. (M.B. trans fl)