House panel to quiz top OTC derivatives execs

[Joanne98]

WASHINGTON (Reuters) - Senior managers from some of the world's largest over-the-counter (OTC) derivatives firms, currently accustomed to little government scrutiny, are scheduled to testify on Tuesday before a U.S. congressional panel looking into the possibilities for regulation.

As lawmakers and the Obama administration push for regulation of the OTC derivatives market, two sources familiar with an upcoming hearing said CME Group Inc (CME.O) Executive Chairman Terrence Duffy was among those invited to testify.

Others on the witness list for the House capital markets subcommittee hearing are Jeffrey Sprecher, chief executive officer of IntercontinentalExchange (ICE.N), and Thomas Callahan, CEO of NYSE Liffe (NYX.N), the sources said.

It was not known which of the dozen invitees had accepted, but most were expected to make an appearance before the panel and Democratic Representative Paul Kanjorski, its chairman.

A panel spokesman was not immediately available for comment.

The hearing witness list, obtained by Reuters, also included Christopher Edmonds, CEO of International Derivatives Clearing Group, and Larry Thompson, general counsel at Depository Trust and Clearing Corp.

Also asked to testify were Robert Pickel, CEO of the International Swaps and Derivatives Association, and Don Thompson, managing director and associate general counsel at JPMorgan Chase & Co (JPM.N), a major player in derivatives.

Kanjorski announced the hearing last week. He said it was meant to "advance the discussion in Congress on derivatives and swaps regulation, especially in considering what new steps we must take to provide transparency in and meaningful regulation of this dark corner of the financial services industry."

The OTC derivatives market, pegged at greater than $590 trillion in notional value at the end of 2008, is where trading takes place in credit default swaps and other exotic financial instruments widely implicated in the global credit crisis.

The massive, high-risk market functioned has operated for years with little government oversight, partly by design. Congress in 1990 adopted a law that protected it from too much regulation.

But many OTC derivatives flew off the rails in 2007 when the housing bubble burst and credit tightened, leaving banks, such as the now defunct Lehman Brothers, with huge losses. Credit defaults swaps played a major role in the troubles at American International Group (AIG.N) that led to its bailout.

GEITHNER CALLS FOR REGULATION

Treasury Secretary Timothy Geithner in May called for legislation to require many derivatives to be traded on exchanges or clearinghouses, rather than over-the-counter.

Banks and dealers have opposed greater regulation, which could make it more costly to issue and trade derivatives.

Warren Buffett in 2003 famously labeled derivatives as "financial weapons of mass destruction."

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http://www.reuters.com/article/ousiv/idUSTRE55728C20090608

[JohnWxy]

1. Reuters left out the most important legislation in the unregulated derivatives market: CFMA 2000

"The OTC derivatives market, pegged at greater than $590 trillion in notional value at the end of 2008, is where trading takes place in credit default swaps and other exotic financial instruments widely implicated in the global credit crisis.

The massive, high-risk market functioned has operated for years with little government oversight, partly by design. Congress in 1990 adopted a law that protected it from too much regulation."
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The legislation that really caused the damage was the Commodities Futures Modernization Act (2000) slipped in as a rider to the Omnibus Spending Bill in the waning hours of the Clinton administration by one Phil Gramm. virtually nobody knew this legislation was in the 11,000 page OSB. This legislation established trading in Credit Default Swaps would not be regulated or monitored. This is what kept enormous activity in the derivatives trading completely hidden from the any public oversight.

Credit Default Swaps helped in the marketing of higher rate (read: sub-Prime mortgages) Mortgage Backed Securities, lead banks to feel they didn't need to keep as much in reserve to cover potential losses (they met with the then SEC chairman Donaldson in April 2004, to tell him they could get by with one third as much reserves as they were required to maintain at the time. Donaldson agreed and banks reserves were allowed to go from a 12:1 Debt to Equity ratio to a 30+:1 ratio. This massively exacerbated the problem of bank's loss of liquidity when they began to experience write downs of assets (loans) due to increased risk of defaults on these loans - because the banks had lent much more money relative to the amount of money they held in reserve.).


For more on Credit Default Swaps see: The Bet that Blew up Wallstreet

[elleng]

2. Maybe the BEST reason to applaud mcC's Nov. '08 defeat:

Gramm wouldn't be in following administration.

[TeganZ]

3. OTC derivatives

Have you heard William Brodsky's views on OTC derivatives?

<a href="http://cboenews.com/9-29-2009/index.php">William Brodsky, Chairman and CEO of the CBOE and Chairman of the World Federation of Exchanges, shares his views on OTC derivatives in the Financial Times’ "Trading Room"</a>

[westerebus]

4. Welcome to du.

:hi: