Isda AGM: Regulatory scrutiny of derivatives likely, says Moulds

Speaking at the Isda annual general meeting in Vienna this morning, Moulds warned there is increased concern among regulators about the risk linkages between products and counterparties, posing a challenge for the industry. “Anything beginning with the letter C – whether CDS or CDO or CLO – is being tarnished with the same brush,” he said.

Moulds drew parallels with the 1990s, when a series of derivatives mis-selling scandals involving Cincinnati-based Procter & Gamble, Orange County in California and Cincinnati-headquartered Gibson Greetings created political pressure for regulators to take action. This sparked an industry lobbying effort led by Isda that continued until the US Congress gave final approval to the Commodities Futures Modernization Act of 2000, which stipulated derivatives were not subject to regulation by the Commodities Futures Trading Commission, effectively preserving their status as over-the-counter instruments.

Moulds stressed there are key differences between the current situation and the regulatory pressure of the 1990s. “Today, I think it’s safe to say there is widespread appreciation of the important role that privately negotiated derivatives play and the benefits they bring,” he said. “In the 1990s, many used the term derivatives as an umbrella description of not just privately negotiated swaps, but also of exchange-traded derivatives and other derivatives securities. There were any number of incidents in which privately negotiated derivatives played no part – Barings as an example – and it was quite a task to constantly explain the differences.”

Regulators are now much more cognisant of what derivatives are and the benefits they bring, added Moulds. Nonetheless, further educational work is needed to inform supervisors of the advantages of OTC derivatives.

“At the end of the last period of heightened scrutiny, Isda and the industry emerged strongly – the business continued to grow and innovate, more and more customers sought to access the benefits of derivatives, and derivatives assumed a central role in the global financial system,” said Moulds. “It took a lot of work then. It will similarly take a lot of work now, and in many respects the challenges are significantly more complex given the growth of the industry.”

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