Asian Banker SummitMarketsExchanges ConferenceRegulation in Derivatives Markets.docx

1、Asian Banker Summit Markets Exchanges Conference Regulation in Derivatives MarketsPrinted from: http:/www.seccom.govt.nz/speeches/2010/190410.shtml?print=true on Tue 12 October 2010 Regulation in Derivatives MarketsJane Diplock AO Chairman, Securities Commission New Zealand & Executive Committee, IO

2、SCOAsian Banker Summit - Markets and Exchanges Conference19 April 2010, SingaporeIm delighted to be back in Singapore, and in such prestigious company, to contribute - and learn from - this important conference: New Landscapes, New Players, New Rules.This is indeed a timely conference and debate. Ju

3、st yesterday morning on CNBC I heard President Obama describing the derivatives markets as billions of dollars sloshing around in the system, trading under the cover of darkness. From all around the world there has come a call for greater light to be shed on the trading of derivatives and Government

4、s are considering and reflecting on the best way to do this.This week has shocked the world with the dislocation caused by a volcano in Iceland. Suddenly planes are halted and the plans of millions are thrown into disarray.The global financial crisis hit many in the same way. It seemed to come out o

5、f a clear blue sky. It left them reeling with shock, unable to take in their losses. Some will suffer from the aftershocks for the rest of their lives. For all of us, one way or another, the financial landscape changed forever. One of the differences between a global financial crisis and a volcanic

6、eruption is, of course, that we remain unable to predict these natural eruptions or to blame others for them. Financial crises, on the other hand, prompt an immediate search for human agency and blame. Its only now that the first shock has subsided that the most challenging question has come into fo

7、cus: what do we need to do in order to prevent such a meltdown occurring again?The regulatory response to the crisis must be one that encourages thriving, transparent, deep liquid markets, and does not reduce innovation in those markets. It must be based on appropriate research and data, and evidenc

8、e of the potential impact regulatory intervention is likely to have. It should also be calibrated and refined through consultation with market participants, particularly those whose businesses would be most closely affectedDerivatives trading markets have been targeted as a prime scapegoat for the g

9、lobal financial crisis. In fact, over the last couple of decades there has been as much distrust of derivatives as there has been enthusiasm. In 2002, one of the USs richest men and most successful investors, Warren Buffett, observed that derivatives were time bombs both for the parties that dealt i

10、n them and the economic system: financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.1 These observations were made before the global financial crisis hit. Since then, both the blame and the rebuttals have been more vociferous. Derivatives MarketsHed

11、ging of positions has been a common way of managing risk for a very long time. : They were developed to manage and lower risk, and crude versions of derivatives have been in use for centuries. Derivatives began being sold off-exchange in the early 1980s. Today, they account for vast sums of money -

12、the Bank for International Settlements estimates the total outstanding notional amount at $684 trillion (as of June 2008).2 Derivatives certainly bring legitimate business benefits. The use of derivatives to hedge positions in business and to offset risk is well understood and an important business

13、tool. The Basel Committee on Banking Supervision has pointed out that credit risk protection through collateral pledged against potential losses in derivatives transactions is a cornerstone of risk management.3 Unfortunately, though, the crisis demonstrated that derivatives trading can also concentr

14、ate and heighten risk. Some commentators have demonised derivatives as a product class. I do not agree with this analysis. Nevertheless, a misunderstanding of derivatives can expose market participants who use them to significant risk. The global financial crisis highlighted the counterparty risk, w

15、here, even though the instrument might well have been sound, the counterparty could not pay.The International Organization of Securities Commissions (IOSCO) report on the subprime crisis published in May 20084 highlighted the fact that a number of structured products relying on leverage magnified bo

16、th risks and returns. A January 2010 report from the Joint Forum5 made up of the financial sectors international standard-setting bodies, including IOSCO, reminds us that one of the factors contributing to the crisis was the inadequate management of risks associated with various types of products de

17、signed to transfer credit risk. This resulted in severe losses for some institutions. These products transfer risks within and outside the regulated sectors.My view is that derivatives trading contributed to the global financial crisis, but was not the main cause. Like poor valuations, miss-selling

18、of products, misuse of off-balance sheet vehicles and poorly understood sercuritisations, they were a contributor. Some derivatives destroyed value because of significant opacity in pricing valuation, and because many were traded over the counter rather than in regulated exchanges, and therefore the

19、re was an absence of transparency in relation to positions . As Gary Gensler of the US Commodity Futures Trading Commission has observed,6 the crisis demonstrated that OTC derivatives added leverage to the financial system, with more risk being backed up by less capital. Derivatives markets continue

20、 to grow in size, product range and complexity, with complex trades making up an increasing proportion of new over-the-counter - and, therefore, unregulated - transactions. Some hedge funds and financial institutions that trade derivatives do so using very small amounts of their own capital and very

21、 large amounts of borrowed money. The effect of all this is to make these derivatives extremely risky, while often obscuring that fact. A global push for regulationI firmly believe that, if we are to build a framework that will assist us in avoiding future financial crises in global markets, we must

22、 be prepared to work together to build an effective regulatory framework for OTC derivatives - one that will function alongside the regulatory frameworks for securities and on-exchange derivatives. Twenty-first century financial markets are no longer geo-political islands. Money moves around the wor

23、ld and back again at the touch of a mouse, and regulatory frameworks must be just as agile at leaping borders. Regulatory reform must be thorough and it must be international. Nothing less will do. This is what G20 leaders believe. Last year in Pittsburgh7 they agreed that, by 2012, all standardised

24、 OTC derivative contracts should be traded on exchanges or electronic trading platforms, and cleared through central counterparties. Non-centrally cleared contracts, they said, should be subject to higher capital requirements. The Basel Committees March 2010 reportThe Basel Committee on Banking Supe

25、rvision recently published the findings of its stock-take of legal and policy frameworks for cross-border crises resolution.8 It said the crisis revealed that, although large financial institutions cross-border derivatives activities could be internationally beneficial, they brought with them signif

26、icant risks of cross-border contagion. The committee said policymakers could encourage more use of risk mitigation mechanisms and strengthen legal frameworks to ensure their enforceability. This would help reduce interdependencies among individual market participants, better insulating them from the

27、 failure of individual financial institutions. This would also reduce systemic risk and make financial or market functions more resilient during a crisis. It recommended greater standardisation of derivatives contracts, migration of standardised contracts onto regulated exchanges and the clearing an

28、d settlement of such contracts through regulated central counterparties, and greater transparency in reporting for OTC contracts through trade repositories. The committee noted progress over the last two decades, with legal reform adopted in most major jurisdictions. It saw less progress in some eme

29、rging market jurisdictions, and said further convergence and strengthening of national frameworks was strongly desirable. IOSCO workIOSCO was quick to react when the subprime crisis hit. It had identified concerns and decided to initiate work as early as November 2007, and its report on the subprime

30、 crisis was released in May 2008. The report noted the risks posed by some collateralized debt obligations (CDOs). By relying on leverage, investors in such CDOs would magnify returns but at significant risk. It made recommendations to better protect public markets from the spillover effects caused

31、by activity on private markets. Early this year, the Joint Forum released a review on regulation requested by the G20 through the Financial Stability Board. It analyses and makes recommendations on key issues arising from differential regulation in the international banking, securities, and insuranc

32、e sectors, focusing on unregulated or lightly regulated entities or activities where systemic risk is high. The issue of credit risk transfer associated with derivatives was addressed by the Joint forum in 2005 and later in 2007. In November 2008, IOSCO initiated a review of the scope of financial m

33、arkets and in particular unregulated financial markets and products. This resulted, after extensive consultation with industry, in a final report in September 2009. 9 This report examines ways to introduce greater transparency and oversight in unregulated financial markets and products. It aims to imp