Traders Magazine, March 2012
CQ&D: F.A. Hayek, a famous philosopher and economist who wrote "The Road to Serfdom," consistently argued that the government must strictly obey the same laws it imposes on society. Is the government obeying the law in implementing Dodd-Frank?
Mr. O'Malia: We're pushing the bounds.
CQ&D: Do you agree with legislation that would delay the implementation of Dodd-Frank by a year and a half?
Mr. O'Malia: Congress ought to evaluate the rules that we, along with other regulators, have put out thus far, and determine for itself whether a "time-out" is needed. Right now, we have Dodd-Frank. The commission needs to focus on implementing Dodd-Frank in an appropriate manner, taking into account congressional mandates, public comments and costs and benefits.
CQ&D: Clearing is often pointed to as the way to prevent a rehash of the OTC derivatives problems of three years ago. Will more clearing prevent a repeat of the market meltdown?
Mr. O'Malia: There are a lot of features of the '08 disaster that would have not been prevented as a result of clearing. But I do believe that clearing will help with risk management, and with encouraging the standardization of swaps. However, as I said earlier, certain end users will always need a customized swap product to hedge their commercial risks. We need to be cognizant that clearing may not work for those products. In addition to clearing, two steps are important to risk management. First, electronic trading. We need to further explore the link between clearing and electronic trading. For example, one of the questions I have asked-and received no answer to-is: Can a product have enough liquidity to be subject to mandatory clearing but not trading? That is a question that Asian regulators definitely have in mind, as my recent trip to that region proved. I am hoping the commission addresses this question in an upcoming roundtable on "made available for trading."
CQ&D: The other feature?
Mr. O'Malia: The other feature is data reporting-giving the commission and the market more data. With data reporting, the commission-and other regulators-will have a window into swaps exposure and where systemic risk lies. That, in and of itself, will be a big improvement on '08.
CQ&D: How do regulators determine which contracts can continue to use the bilateral, dealer-to-dealer or dealer-to-end-user model, and which ones must use clearing? Is there a rule of thumb regulators can use?
Mr. O'Malia: That's a great question. I have been frustrated in our rule-making, and this means doing our homework on two things: One is what is clearable? We have five statutory features to direct our analysis as to what is clearable. Trading liquidity is one of them. We didn't tell the market how we plan on using these statutory features, how they will be weighted in our decisions, etc.
CQ&D: You're also saying that clearing is a good idea, but it also has its limitations as it relates to swap execution facilities.
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