Industry panel: avoid one-size-fits-all approach to OTC derivatives

Testifying before the subcommittee, Timothy Murphy, foreign currency risk manager at consumer products company 3M, underlined the importance of OTC derivatives to companies looking to manage their exposure to foreign exchange, interest rates and commodities, and voiced "strong concerns" about the impact regulation could have on the market. He emphasised that not all OTC derivatives were involved in triggering or exacerbating the financial crisis, and therefore "not all OTC derivatives should be treated the same".

Murphy - whose views were echoed by Don Thompson, managing director and associate general counsel at JP Morgan - opposed any mandate to transfer all derivatives to clearing houses or exchanges. Thompson warned the standardisation of OTC derivatives - which moves towards clearing and exchanges would require - would "limit [companies'] ability to manage risk". In particular, companies would be required to dynamically post collateral - potentially increasing operating costs - and would not qualify for hedge accounting, leaving them open to market volatility.

Moreover, most panel members were keen to stress the benefits of companies being able to have OTC derivatives tailored to their needs. "Customisation does not necessarily mean complexity," explained Thompson.

Robert Pickel, chief executive of the International Swaps and Derivatives Association, underlined the work Isda and the industry had already undertaken with respect to standardisation. Pickel pledged continued support to regulators in helping develop further regulation for the OTC derivatives market, while underlining the market's central role in the financial services industry.

Meanwhile, Christian Johnson, professor at the University of Utah School of Law, warned against overly harsh regulation, as the OTC derivatives market is a "truly global industry that will move towards wherever it is easiest to trade".

In opening remarks, the majority of the subcommittee acknowledged the importance of OTC derivatives to risk management practices for US companies. Republican congressman Tom Price said: "When used appropriately, [derivatives] can be a very effective risk management tool." Price also accepted the particular importance of OTC derivatives and cautioned against implementing one-size-fits-all regulatory measures.

This positive view of OTC derivatives was not shared by all subcommittee members, however. "At best these derivatives are insurance; at worse they are a bet at the casino," said Democrat congressman Brad Sherman.

See also: Geithner outlines regulations for over-the-counter market