Reuters: Regulatory News: UPDATE 1-Public prices key to reducing derivatives risk-Gensler

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UPDATE 1-Public prices key to reducing derivatives risk-Gensler May 2nd 2012, 17:23 Wed May 2, 2012 2:13pm EDT By Karen Brettell CHICAGO May 2 (Reuters) - The Commodity Futures Trading Commission and global regulators are committed to enforcing rules that require prices in the $700 trillion privately traded derivatives markets to be more transparent, despite efforts to overturn some rules, CFTC Chairman Gary Gensler said on Wednesday. Price transparency, before and after trades, is one of the most hotly contested derivatives rules, with many large banks, some fund managers and the trade group International Swaps and Derivatives Association opposing some CFTC requirements. The CFTC requires that trade prices be shown by electronic trade platforms to at least 5 dealers before trades are entered into, if the position is standardized and eligible for central clearing. A U.S. bill signed into law last month, however, contains a provision that seeks to override the ability of the CFTC to enforce this. Speaking at ISDA's annual meeting in Chicago, Gensler said he doesn't support the need for such provisions in the bill, known as the "JOBS" Act. Banks argue that disclosing prices before trades are made would allow others to trade ahead of an investor seeking to enter into a position, which would make it more difficult to execute a trade, and would harm market liquidity. "There are times when increasing transparency can reduce liquidity," such as for large trades, said James Hill, managing director at Morgan Stanley, who was also speaking at the ISDA conference. Others counter that banks oppose the rule as the lack of transparency allows them to benefit from higher margins charged on trades. Dealers fight against transparency because no one wants to lose margins, said Luigi Zingales, a professor of economics and business at the University of Chicago. "The question is who has more political power in drafting the rules," Zingales said at a conference panel on Tuesday. Public disclosure of trade pricing is also key to reducing trade costs, increasing market liquidity and bringing additional investors to the market, Gensler said, calling derivatives "the largest dark pool in our financial markets." The price transparency is also key to reducing the risk of failure of a central clearinghouse, which would cause large losses across the economy. The clearing houses need transparent prices and liquid markets to properly manage the risks of the contracts they clear and guarantee, Gensler said. Gensler added that the CFTC is committed to defending rules including position limits in oil markets that are designed to reduce excessive speculation in a specific market. The Securities Industry and Financial Markets Association and ISDA filed a legal challenge to the rule in December. "The CFTC is vigorously defending this rule because it's the law and because it promotes market integrity," Gensler said. Link this Share this Digg this Email Reprints

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