The burden of excessive regulation and accounting rules are preventing the OTC market working efficiently, hindering innovation and in some cases deterring end users from hedging risks, industry heavyweights said at the conference.
Keith Bailey, ISDA chairman and coo of debt markets at Merrill Lynch, said divergence of regulation from economic reality is a deterrent to hedging. For example, the requirement that loan portfolio managers use mark-to-market accounting means they may decide not to hedge because they don't want additional volatility on their balance sheets. Although such hedges might be imperfect, a partial hedge is better than no hedge at all, he argued.
The fear of entering a trade that might in some way be deemed questionable, for example a tax-efficient structure, has introduced a note of excessive caution among many end users and has pushed more responsibility onto dealers. "We are turning away transactions, many of which would have been fine," noted Mark Harding, group general counsel at Barclays Bank. "If you don't structure your deal to pay the most tax you can, you could have a problem," he quipped.
Conversely, the interest rate market is a prime example of minimal regulation leading to a flourishing market, according to Phil Gramm, vice chairman of UBS Investment Bank. The former senator attributes the U.S. economy's bounce back from the stock market's precipitous fall at the end of the '90s in part to the way swaps have dispersed risk and therefore aided the domestic economy. Gramm urged delegates to resist further regulation of the derivatives market, adding: "When you stand up for your industry, you are defending America."
