There is a group of people who meet one Wednesday every month in Manhattan known as the derivatives dealers club. These individuals work to control the derivatives market, a market which is highly unregulated and primarily controlled by this particular group. The recent argument is that the derivatives market requires greater transparency; transparency that is not available at this time. The individuals who work to control the derivatives market argue that such transparency is impossible, given the wide fluctuations present between derivatives, and those in Washington are unwilling to act as a result of large amounts of campaign contributions that they have received from these different individuals. There are four different positions regarding how this particular situation should be handled. They are as follows:
1. “Regulators should assert influence over the derivatives market, like they do with stocks, and require derivatives to be traded on an open exchange where buyers and sellers disclose prices and fees” (Legal/Ethical Challenge, p. 360).
2. “Nothing should be done to change how derivatives are bought and sold. If buyers and sellers don’t like the lack of dealter transparency then they can choose not to trade derivatives” (Legal/Ethical Challenge, p. 360).
3. “The derivatives market should be modified only slightly to allow other players (e.g. banks) to provide derivatives. If they then choose to disclose prices and fees, that is their choice, just as it is the choice of others to buy derivatives” (Legal/Ethical Challenge, p. 360).
4. “Invent other alternatives” (Legal/Ethical Challenge, p. 360).
Of these four different options available, my personal position regarding the matter is that the current and most recent rules set by the Commodity Futures Trading Commission for international derivatives should also be applied to the rest of the world, as opposed to simply the American and European markets. In essence, this is similar to the first option, but the events of the past week serve to make this particular question a moot point, as the regulation and the oversight has already been determined and it was put into place within the last week.
On October 10, 2013 the CFTC guidelines for international derivatives deals were put into effect, setting rules for derivatives, hedge funds, and even for all American based companies who had offices overseas that they traded out of (Hattem, 2013). No longer are these international deals able to be completed through vacation spots and P.O. Boxes, but instead they must all file proper documentation with the appropriate agencies (Hattem, 2013). In addition, there has been a “system of substituted compliance” put in place, which requires European regulators to oversee all deals completed within their jurisdiction (Hattem, 2013).
As a part of the Dodd-Frank financial reform law, the law that gave regulators the ability to oversee derivatives, other rules went into effect as well, such as the requirement of derivatives traders to operate on “government-backed swaps execution facilities,” or SEFs (Hattem, 2013). There are currently seventeen different SEFs that have been temporarily registered and have already started operations, and these SEFs appear to be successful, as on the first day that these went into effect, over 1,200 trades took place through this medium (Hattem, 2013). This shows that a certain amount of accountability is necessary in order to work to monitor the derivatives market, and, what is more, is that those who are participating in the derivatives market recognize the need for this as well, as they are willing to use the new platforms that have been put into effect. While it is true that we cannot tell the full extent of how well this particular program and platform will be received this soon after launch, the initial responses to the program at hand appear to be overwhelmingly positive.
In order to be able to fully address this point, let us look to the other options available. Option number two indicated that nothing should have been done, and these types of regulations were unnecessary. There are several points that may be argued in this regard. The first being that if there was no need for regulation, these new laws would not have been put into place, and these new platforms would not have been created. The second argument against this is that those who are against transparency are most likely against it as a result of a specific action that they are taking, such as increasing their fees without the other party knowing. This type of shady backdoor dealing does not have a place in the international financial market.
Option three allows for a slight modification indicating that those who wish to provide full transparency be allowed to do so, while those who do not want to do so do not provide that information. This would create an unbalanced market, with the majority of the deals that are completed being those that provide full transparency. The other deals, those that did not wish to provide that transparency would likely also be used for other forms of shady dealing, resulting in a split occurring that could cause more problems than it works to solve.
In this manner, the new rules and regulations work to protect all parties involved and work to make sure that all parties are behaving in a manner that is both honorable and decorous. By working to create these different platforms, it is possible to see all of the different prices and fees, allowing sellers and buyers alike to make decisions that are not only better informed, but which allow all parties to ensure that they are getting the best deal possible.
- Hattem, J. (2013, October 11). International derivatives trading rules take effect . Retrieved from http://thehill.com/