Bill Brodsky, chairman and chief executive of Chicago Board
Options Exchange, has called for greater coordination between
US and EU banking regulation, to minimise the danger of
regulatory arbitrage and systemic risk and to create a well
functioning derivatives market.
Writing in the Financial Times on September 24 about
regulating over-the-counter derivatives, Brodsky called for
international governments to legislate the trading of OTC
derivatives on "liquid and organised markets".
Brodsky, who also chairs the World Federation of Exchanges,
said all standardised contracts should be subject to
centralised trading and clearing, while other contracts should,
at least, be subject to tougher regulatory standards.
"If we are to reduce the impact of potential failures, then
those OTC derivatives that cannot – or will not
– be standardised should, at minimum, have heightened
capital requirements," he said.
Brodsky said the global financial crisis had revealed the
inherent weakness of OTC markets – the value of assets
traded became difficult to assess, banks lost confidence in
each other, and illiquidity spread.
"By contrast, regulated exchanges delivered as promised: no
failures, no closures, no taxpayer rescues," he said.
Brodsky addressed claims that attempts to limit the risks of
OTC derivatives would make hedging too expensive or too
difficult, or that OTC products were too complex to be
standardised. "Nobody benefits by maintaining the status quo of
a system that brought us to the brink," he said.
The CBOE chief said that while the transition of bilateral
trading would be an important first step, truly effective
legislation would require international cooperation.
Without it, financial institutions could engage in
"cross-border regulatory arbitrage", as countries tried to
attract business by lowering their regulatory requirements.
Brodsky said this was the main obstacle to lowering global
"The US Treasury and Federal Reserve, with the support of
the SEC and the CFTC, must work with the European Commission
and central banks, or set up a commission or coordinating body
to accomplish this," Brodsky said. He suggested that G20
governments could create a common framework that would set
similar international standards.
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