12 September 2012

A clear divergence of views

The OTC derivatives market is going through a lot of changes these days as regulators around the globe implement the G-20 reforms. As everyone in the industry is eagerly watching the space ahead of the year end deadline, the merits of the changes in the OTC derivatives market will be debated by experts at Sibos in Osaka.

On 27th October, Sibos is introducing a new format – the Sibos Colloquium in which academia and industry will debate on the forthcoming OTC derivatives regulation. The Colloquium will be hosted by the SWIFT institute, which was created in April this year to foster research and also contribute to the knowledge creation and dissemination in the financial services industry.

At the Colloquium will be two experts – Manmohan Singh, senior economist at the International Monetary Fund and Godfried De Vidts, director of European affairs at ICAP, the UK based inter-broker dealer.  While Singh will be presenting his paper – ‘Making OTC derivatives safe – a fresh look’, Vidts will be presenting his views on the proposals.

The paper clearly argues Singh’s point that central clearing of OTC derivatives will not mitigate the risk but would rather shift the risk from banks to central counterparties (CCPs). Singh has been vocal about his opposition to the new regulations that mandate central clearing of OTC derivatives in Europe and US and has been quoted widely in the financial media. Vidts, a veteran who has played a key role in the development of European financial industry on the other hand believes that while industry is focusing on the derivatives market, a potential risk in the shadow banking area is much neglected. According to him, non-bank financial market participants such as hedge funds and money markets funds, can cause a buildup of systemic risk but are not receiving regulatory attention.

So what will be the centre of discussion for the experts? Here is a glimpse from Singh’s paper. “Under the present regulatory overhaul, the OTC derivative market could become more fragmented. Furthermore, another taxpayer bailout cannot be ruled out. A reexamination of the two key issues of (i) the interoperability of CCPs, and (ii) the cost of moving to CCPs with access to central bank funding, indicates that the proposed changes may not provide the best solution. The paper suggests that a tax on derivative liabilities could make the OTC derivatives market safer, particularly in the transition to a stable clearing infrastructure. It also suggests reconsideration of a ‘public utility’ model for the OTC market infrastructure.” So what has Vidts to say on regulation? He argues, “The G-20 regulatory reform will encourage greater central clearing of derivatives and the Dodd Frank/EMIR mandate risk mitigation for non-cleared trades.  As portfolio risk exposures arise across bilateral counterparties and CCPs, and netting opportunities reduce, further requirements should not be necessary.”

With such diverse views, it should be a very lively session. See you there!

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