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 systemic risk.
“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.