Derivatives not to blame for Enron failure, says Greenspan

Alan Greenspan, chairman of the US Federal Reserve, yesterday defended the role of derivatives in financial markets during a testimony to Congress. "The record of [derivatives] performance, especially over the past couple of stressful years, suggests that on balance they have contributed to the development of a far more flexible and efficient financial system,” said Greenspan

Asked by chairman of the House Committee on Financial Services, Michael Oxley, if Congress should reassess the Commodity Exchange Act in light of Enron’s demise, Greenspan said: “The legislation that you passed strikes me as appropriate and still valid. I see nothing that has changed from the discussions we had when that was under review." The legislation protects over-the-counter derivatives transactions from regulation by the Commodity Futures Trading Commission.

But Greenspan also urged Congress to pass long-awaited 'netting' legislation that would allow counterparties in derivatives transactions to unwind their positions quickly in the event of corporate bankruptcies. “The legal uncertainty that still exists on certain types of derivatives is a cloud over these markets," he said. "There is no downside to passing this legislation [and] there is an awful lot of upside."

Greenspan said increased access to real-time information and deregulation of the markets, means imbalances are more likely to be contained.