Greenspan attacks regulation of OTC derivatives again

Federal Reserve chairman Alan Greenspan has again warned that forced disclosure of proprietary information would undercut innovation in the over-the-counter derivatives markets.

"Regulation is potentially damaging, because regulation presupposes disclosure, and forced disclosure of proprietary information can undercut innovations in financial markets,” said Greenspan, in a speech yesterday to the Society of Business Economists in London. He added that regulation and disclosure in OTC derivatives markets is “immediate to current regulatory concerns”.

Greenspan’s remarks follow previous criticism of US Californian democrat senator Dianne Feinstein’s attempts to introduce measures to regulate the energy and commodity derivatives market. The International Swaps and Derivatives Association has also criticised the proposed legislation.

Commenting on the way OTC derivatives market innovations create new ways to disperse risk, Greenspan said new products temporarily earn a “quasi-monopoly rent”, or short-term profit, that must be encouraged. “To require disclosure of the structure of the innovative product either before or after its introduction would immediately eliminate the quasi-monopoly return and discourage future endeavours to innovate in that area.”

Greenspan warned that even disclosure of innovations on a confidential basis solely to regulatory authorities could inhibit risk-taking. “Innovators can never be fully confident, justly or otherwise, of the security of the information.” Greenspan, Treasury secretary Paul O'Neill, Securities and Exchange Commission chairman Harvey Pitt and Commodity Futures Trading Commission chairman James Newsome, said in a letter last week to US senators that proposals to subject market participants to disclosure of proprietary trading information is unwarranted.