On Monday, December 8, the House Agriculture Committee held a hearing to discuss the role of credit derivatives in the U.S. economy. This was the third in a series on the topic. Witnesses included:
- Terrence A. Duffy, Executive Chairman, CME Group
- Johnathan H. Short, Vice President and General Counsel, IntercontinentalExchange, Inc.
- John O’Neill, Senior Analyst, Fixed Income Derivatives, LIFFE, NYSE/Euronext
- Thomas Book, Member of the Executive Board, Eurex Clearing AG
- John Damgard, President, Futures Industry Association
- Robert Pickel, Chief Executive Officer, International Swaps and Derivatives Association
- Don Thompson, Managing Director and Associate General Counsel, J.P. Morgan on behalf of J.P. Morgan and the Securities Industry and Financial Markets Association
- E. Gerald Corrigan, Managing Director, Goldman Sachs & Co. and former President of the Federal Reserve Bank of New York
- Bryan Murtagh, Managing Director, Fixed Income Transaction Risk Management, UBS Securities LLC
The hearing focused on two main questions: first, the role of a central clearing platform (“CCP”); and second, the appropriate government regulator and the necessity for a global approach.
Central Clearing Platform. The Committee asked whether all derivative products should be centrally cleared and how long it would take for a central clearing platform to become operational. Most witnesses agreed that standard products should be cleared but that contracts with one-off structures would not be suitable for central clearing. Central clearing of some standard products (in particular, credit default swaps on indices) could start immediately, but a phased approach would be necessary for others (credit default swaps on single names and tranched products).
Next the Committee asked how to ensure the stability of a CCP. This discussion covered capital and margin requirements, comprehensive risk management systems, and mandatory mark-to-market price reporting.
Regulator for Credit Derivatives Market. The second major topic focused on the appropriate regulator and the necessity for a global approach. Concern was expressed that multiple regulators would result in “regulatory arbitrage.”
Presently, the CFTC, the SEC and the Federal Reserve are all involved domestically. Additionally, clearing organizations in Europe are seeking to participate, which will require coordination among regulators and consistency among regulatory standards. Although participants agreed that the regulators should work together for a consistent approach, at least one expressed a desire to “just get things up and going.”
Overall the tone of the hearing was quite thoughtful. The Committee’s thinking is practical and focused on determining the best regulatory and operational structure for credit derivatives. There was a general recognition that credit derivatives serve an important function. The essential issue now is finding the optimal degree of regulation to maintain an appropriate balance between innovation and risk management.