Treasury's Derivatives Reform Could Endanger Clearing: FIA

A U.S. Treasury push to force more over-the-counter derivatives trading onto exchange platforms could undo an existing effort to reduce risk in the swaps market, according to the head of the industry's main trade group.

John Damgard, president of the Futures Industry Association, said dealer banks may rethink their commitments to new exchange-backed clearinghouses if the facilities are required to accommodate riskier products.

His comments highlight banks' resistance to the Treasury reforms submitted to Congress last week, calling for a broad swath of OTC derivatives trading to be conducted on exchanges or electronic trading platforms, and cleared via exchange-backed counterparties.

"Clearinghouses are not mandatory organizations - they're voluntary," Damgard said in an interview with Dow Jones Newswires.

"If the government starts forcing trades onto clearinghouses that members feel are too risky to validate, the way to protect themselves is to pull out of the clearinghouse."

The FIA represents the dealer banks that dominate over-the-counter derivatives trade, as well as exchanges like IntercontinentalExchange Inc. (ICE), CME Group Inc. (CME) and Nasdaq OMX Group Inc. (NDAQ) that have set up central counterparties to clear swap transactions.

Regulators last year pushed the industry to use such clearinghouses, which provide a central guarantee for credit-derivative and interest-rate swap trades that were previously conducted on a bilateral basis, reducing systemic risk in the multi-trillion dollar sector.

The bank-backed clearinghouses set up by IntercontinentalExchange in the U.S. and Europe have so far handled more than $1.7 trillion in credit derivatives.

The International Derivatives Clearing Group unit of Nasdaq OMX Group has test-cleared $450 billion in interest rate products. CME Group is developing its own clearing services for both types of swaps.

Damgard maintained that the futures industry has a "spotless" record in ensuring market stability, in large part because exchanges have not been forced to clear certain products.

Exchanges had targeted the clearing of more OTC contracts long before regulators started pushing the practice.

However, many remain wary of being forced by regulators to handle more complex instruments that have traditionally been conducted between banks, and which do not fit into exchanges' established risk-management procedures.

"The FIA's position is that the marketplace is the best place to make those determinations, not government edict," said Damgard. "Like a lot of others, I'm a little concerned of Big Brother involving [itself] in a market that has continued to grow quite dynamically."

Damgard said that there will continue to be a role for complex, bilaterally arranged swap deals between banks and their customers, often commercial participants who need hedges tailored to specific needs.

The longtime FIA leader also criticized lawmaker's calls to limit speculators' role in commodity markets, echoing exchange executives' warnings that tighter restrictions could drive business to overseas jurisdictions.

"I haven't heard anybody else say position limits are a terrific idea," Damgard said. "The Brits and Europeans say the issue is manipulation, and there are other ways to deter and detect manipulation of the markets."

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; [e-mail]