Financial Economists Roundtable Issues Statement Emphasizing the Importance of Liquid Derivatives for Domestic and World Markets

"Reforming the OTC Derivatives Markets" Makes Recommendations for Central Clearinghouses and Derivatives Trading

Jun 29, 2010, 10:00 ET from Tepper School of Business at Carnegie Mellon

PITTSBURGH, June 29 /PRNewswire/ -- Restrictions on Wall Street's ability to trade in derivative securities, by legislation or regulation, could substantially reduce liquidity in the market and drive up costs to end users, according to a statement issued today by the Financial Economists Roundtable (FER).  In addition, the statement, which has received the endorsement of many prominent financial economists, supports efforts to increase transparency, assure more accurate pricing, and encourage the migration of derivatives trading to clearinghouses and exchanges through the use of capital requirements.

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"This policy statement makes clear the importance of derivative securities and their liquidity to the market, especially in terms of helping to share risks," said Chester Spatt, the Pamela R. and Kenneth B. Dunn Professor of Finance and Director of the Center for Financial Markets at the Tepper School of Business at Carnegie Mellon University and chairman of the statement's drafting committee. "While we favor greater incentives to encourage the use of central clearinghouses, we also recognize the importance of customized transactions that may not be suitable for central clearing. Of course, we need to continue to encourage innovation in over-the-counter derivatives markets."

The statement makes several important recommendations relating to derivatives trading including:  

  • Recommending incentives for the migration of more derivatives transactions to central-clearing facilities by offering more favorable capital requirements without requiring all transactions to be centrally cleared.
  • Recommending improved criteria for the collateralization of positions that do not reflect standardized derivatives.
  • Supporting the use of data repository requirements, including unfettered supervisory access by regulators and sufficient information to understand systemic risk exposures in the financial system.
  • Encouraging post-trade price transparency for all sufficiently standardized over-the-counter products.
  • Supporting the migration of trading in actively-traded products to exchanges.
  • Support of regulations against market manipulation, while opposing potential regulations on speculative trading, such as on holding "naked" credit default swaps.

The statement was prepared by a FER committee consisting of Professor Spatt, Darrell Duffie, the Sean Witter Distinguished Professor of Finance at the Graduate School of Business at Stanford University, and Albert S. (Pete) Kyle, the Charles E. Smith Chair Professor of Finance at the University of Maryland's Robert H. Smith School of Business.

"Although we advocate incentives to promote greater use of central clearinghouses, they should not be regarded as a panacea," added Spatt. "Central clearinghouses need to be closely supervised as they tend to concentrate risks, which could be a point of vulnerability in the event of a future financial crisis."

The full statement can be accessed at: http://www.tepper.cmu.edu/news-multimedia/news/fer-reforming-the-otc-derivatives-markets/index.aspx.

About the Financial Economists Roundtable (FER): The FER is a group of senior financial economists that meets annually to discuss current economic policy issues. Created in 1993, the FER's major objective is to maintain a forum for intellectual interaction that promotes in-depth analyses of microeconomic issues involving investments, corporate finance, financial institutions and markets.  Statements issues by the FER are designed to raise the level of public and private policy debate and to improve the quality of policy decision making.

About the Tepper School of Business: Founded in 1949, the Tepper School of Business at Carnegie Mellon (www.tepper.cmu.edu) is a pioneer in the field of management science and analytical decision making. It is also among the schools with the highest rate of academic citations in the fields of finance, operations research, organizational behavior and production/operations. The academic offerings of the Tepper School include undergraduate studies in business and economics, graduate studies in business administration and financial engineering, and doctoral studies. 

SOURCE Tepper School of Business at Carnegie Mellon



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