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By: Global Finance
Global Finance brings together a group of industry leaders to discuss the prospects for the exchange-traded derivatives market.
Moderated by Joseph Giarraputo
Global Finance: The global financial system has come through a near-death experience. Almost everyone believes new regulations are required to avoid a repetition. Which proposed regulations that affect exchange-traded derivatives do you believe make sense?
Craig S. Donohue, chief executive officer, CME: The vast majority of the legislation that we see, at least in the United States, is oriented toward either customer protection or more significant regulation for over-the-counter ( OTC ) derivatives markets. There's far less in the legislation that actually pertains to the exchange-traded and centrally cleared markets, which is a reflection of how well the exchange-traded and centrally cleared markets have functioned-particularly during the economic and financial markets crisis. On the listed market side, we have been very supportive of systemic risk regulation, but we are concerned about the way in which that would be accomplished. Both the Securities and Exchange Commission ( SEC ) and Commodity Futures Trading Commission ( CFTC ) have done a very good job and have a tremendous amount of expertise in the oversight of central counterparties, whether they are registered securities clearing corporations on the securities market side or derivatives clearing organizations on the CFTC side.
Craig S. Donohue
Craig S. Donohue has served as CEO of CME Group and its predecessor company, CME Holdings, since January 2004. Donohue oversees the world's leading and most diverse derivatives marketplace and a global workforce of more than 2,000 employees. He has also led the completion of more than $20 billion in mergers and acquisitions, including CME's historic acquisitions of the Chicago Board of Trade ( CBOT ) in 2007 and the New York Mercantile Exchange ( NYMEX ) in 2008. Donohue serves on CME Group's board of directors, as well as the boards of BM&FBovespa (the largest exchange company in Latin America), the World Federation of Exchanges and the Managed Funds Association
William J. Brodsky, chairman and chief executive officer, CBOE: As you look back over the past 18 months, one of the things that worked was regulated exchanges-all over the world, without distinguishing between stocks or options or futures or US or non-US. Very little that has been put forth would in any way inhibit exchange markets. Having said that, the SEC in the US recently proposed re-imposing the uptick rule on short selling-I believe as a result of political pressure-but only in the case where stocks go down 10% in a day. That raises the question of what happens on a global basis where you have the same products trading all over the world with disparate regulation. That's where the lack of harmonization is really a problem. I've seen very little put forth so far that would harmonize any of these things.
William J. Brodsky
Chicago Board Options Exchange
William J. Brodsky is the chairman and CEO of the Chicago Board Options Exchange ( CBOE ) and the chairman of the World Federation of Exchanges ( WFE ).
Prior to joining CBOE in 1997, Brodsky served for 15 years at Chicago Mercantile Exchange ( CME ), where he oversaw the launch of CME Globex and the development of stock index futures. He began his career as an attorney in the securities industry with law firm Model, Roland and Co. in 1968. In 1974 he joined the American Stock Exchange ( AMEX ), where he headed options trading in 1976 and served as executive vice president for operations from 1979 to 1982. He was honored by AMEX in 1994 for his role in the development of its options programs.
Patrice Blanc, chief executive officer, Newedge Group: One of the issues we faced during this crisis was the lack of transparency. Listed derivatives markets, which represent Newedge's core business, are very transparent, very liquid and work very well. Even under huge stress, we haven't seen any major issue or default. Everything worked fine through the financial crisis. Regulators should-and I think they want to-bring more transparency to the marketplace, to make prices available for everybody around the world. This is one key issue regulators should focus on, because more transparency means less systemic risk.
Blanc was named CEO of Newedge Group on the launch of the company in January 2008. Newedge is a 50/50 joint venture that brought together the businesses of Fimat and Calyon Financial. Blanc joined Fimat Paris as the head of the firm's trading desk on the MATIF in 1989 and became deputy general manager of the branch in September 1991. From July 1994 through 1997, he was responsible for establishing Fimat's office in Brazil and was appointed Fimat Brazil general manager in January 1995. In November 1997 Blanc joined Fimat New York as general manager and became president and CEO of Fimat USA in July 2000.
Blanc has 23 years of experience in the derivatives and financial markets. He is on the board of the Futures Industry Association.
Bernard W. Dan, former chief executive officer, MF Global: Some of the things going on are potentially not as positive for the listed world-some of the discussion on position limits for energy, in particular. It's a populist-driven solution to try to control volatility and price, but there are other ways to do it than by limiting participation. It's potentially not good for the industry, but if it is going to be instituted, I would rather have the exchange do it than the CFTC because the exchange is much closer to the marketplace, understands position accountability and-to their credit-stood up and said they would institute it. What's the negative of that? What made this industry strong is the deep liquidity and the transparency. With better reporting, better transparency, better association of the real position accountability rules, the exchanges could manage that, without major problems and with much bigger markets.
Bernard W. Dan
Former chief executive officer, MF Global
Note: Since this roundtable took place, Jon S. Corzine has taken over as chairman and chief executive officer of MF Global.
Garry Jones, group executive vice president, head of global derivatives, NYSE Euronext: At a presentation I gave recently, I put up a slide showing a list of proposed regulations-central counterparties, careful control of risk, transparency and so on-and asked the audience to guess when it was written. Everyone guessed this year or last year, but it was actually written in 1999 after the Long-Term Capital problem. Virtually all the issues that are mooted at the moment by regulators on both sides of the Atlantic were listed there in 1999. The problem this time, though, is different. We were very close to a very serious collapse-in lots of ways. But here we are, a couple of years later, and banks are rebuilding their balance sheets; people seem to be getting back to normal. I hope people don't forget the potential cataclysmic problems we had and go easy on everything because already I'm seeing some things watered down because of the difficulty, on both sides of the Atlantic, to actually get things done. I hope we do learn from past mistakes.
Garry Jones is the group executive vice president and head of global derivatives for NYSE Euronext. He is the CEO of NYSE Liffe, the group's global derivatives exchange, and a member of the NYSE Euronext management committee.
Jones joined NYSE Liffe from ICAP, where he was CEO of ICAP Electronic Broking (Europe) and, prior to the merger in 2003, CEO and president of BrokerTec Europe, the bank consortium-owned global fixed-income electronic trading platform. Prior to this, Jones worked for almost 20 years in a variety of senior management roles in trading, sales and research for investment banks in the US and Europe. Jones has an MA from Oxford University and an MBA from Stanford Business School.
Clark Hutchison, co-head of listed derivatives, Morgan Stanley: Market participants need a robust environment where buyers and sellers can transact, but also on the clearing side they need an environment where there is plenty of capital in clearinghouses and where there's liquidity to underwrite whatever risk is taken. As a result, one of the recent regulatory initiatives that would limit who can own or have positions in clearinghouses doesn't make sense. The participants today who are largely participating on the exchanges are putting up their capital. To limit their ability to put up capital and to limit their participation actually drives away liquidity and drives away some of the protections that people are saying might be availed by that limitation.
Co-head of listed derivatives, Morgan Stanley
"I would like to see the regulators come up with principles rather than mandates"
GF: How hopeful are you about harmonization of regulation?
Brodsky: I strongly believe that it is the right way to go when you look at the types of firms that do business globally and the types of products we trade. It certainly would be the desirable thing. But in reality, when you factor in politics and populism, I'm very pessimistic that there'll be any serious attempt to harmonize before the decisions are made.
Donohue: There are areas where harmonization could be valuable, but they're quite narrow and discrete, and you need to have different approaches that actually meet the different needs of the different market segments that we're all involved in. What we really have to focus on is the gaps in regulation or the oversight necessary to have the markets function as well as they might instead of making everything consistent just for the sake of making it consistent.
Jones: OTC markets and listed markets are essentially continuums of the same market, and, in both, one of the biggest issues is mark to market-what is the closing price of a security on any given day-and secondly, what is the risk management of a position? If you've got bilateral OTC agreement with collateral moving back and forth, that's similar to futures margining. But in many OTC cases that isn't the case. People take each other's credit risk, and they don't actually move money about every day. If nothing else comes out of this, the issue of a proper mark to market and proper point of reference, be that from the exchange or elsewhere, is very important. Secondly, that people shouldn't be allowed to build up large positions with no reference to having to fess up to their losses. Obviously, that then contains leverage to some extent, because if you have to fess up the losses, you can't lever it in the same way.
Dan: I'm not optimistic about harmonization. Each country has had such a fundamentally different experience with dealing with the crisis that they're responding to it differently. Some are requiring stringent oversight, more capital, a different sort of tax environment, and that's going to cause companies to move and reduce activities in certain parts of the world. If you're a shareholder-driven company, you can't earn sufficient returns in some of those jurisdictions. On the other hand, price discovery could easily be harmonized in any sort of environment. Managing systemic risk should also be something countries around the world could jointly respond to.
Blanc: Regulation harmonization and derivatives standardiza?tion are good for centrally cleared volumes, so we look at them with a positive attitude. That said, harmonization and standardization are certainly challenging concepts for regulators and some market participants.
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