Regulatory reform of US over-the-counter (OTC) derivatives markets must be accompanied by concurrent reforms for US futures exchanges to assure “rationalisation of regulation for the entire financial services industry”, according to Congressional testimony presented by Chicago Mercantile Exchange (CME) chairman Scott Gordon last month.
The hearing was held to review a recent report issued by the President’s Working Group on Financial Markets (PWG). The PWG was set up in late 1998 by President Clinton to study ways to reform US risk management in the wake of turmoil in international financial markets during the summer of 1998. The PWG principally focused on OTC markets in which parties privately negotiate risk transfer agreements.
“The Report begins with a conservative call for legal certainty for OTC swaps. It veers from that simple principle to a radical realignment of markets and regulators by redefining a swap to include standardised, cleared, futures contracts traded on exchanges regulated by the Securities and Exchange Commission or by bank regulators,” Gordon said.
That realignment, Gordon said, fails to address the regulatory disparity suggested by the PWG report in its recommendation for legalising single stock futures traded in unregulated markets, while not calling for a reversal of an 18-year-old “temporary” restriction on such contracts at regulated exchanges.
Gordon said failure to reform futures industry regulation could potentially drive US futures business overseas.