Morrison & Foerster panel: Industry braces for OTC derivatives reform

By Emma Trincal

New York, Jan. 25 - The upcoming over-the-counter derivatives legislation and its impact on the structured products market was one of the main topics of discussion at a panel on structured products regulation held last week in New York.

Big impact

"Once the OTC derivatives legislation is passed, the impact may be big for financial institutions as it will cause significant changes in their internal operations and technology and could fundamentally impact their business model," said Gillian Christie, director at Deloitte Consulting, who was one of the panelists at the conference hosted by law firm Morrison & Foerster.

As the momentum is increasing for OTC reform, various divisions at banks are getting educated in order to be prepared for the new market regulation.

Technology divisions of banks for instance are quite busy standardizing swaps agreements and processes in order to facilitate electronic trading, panelists said.

Lawyers watch

On the legal front, teams of regulatory lawyers are also investing time getting familiar with the new legal framework and getting ready to react to the new OTC legislation. Banks understand that the government's goal is to reduce systemic risk, but their concern is to make sure that the new measures will not impede the good functioning of the market, panelists said.

In particular, in its efforts to increase transparency, the government should make sure to implement measures that will not squeeze liquidity, they noted, adding that the regulator needs to understand how structured products and derivatives work and their importance to the economy.

Regulate with care

The upcoming legislation will impose new mandatory clearing requirements, and a member of the panel said, "We need to understand the details: what is cleared? Who decides what should be cleared? The devil is in the details there."

Among the proposals included in the "Over-the-Counter Derivatives Market Act of 2009" are the requirements that swaps be cleared by a derivatives clearing organization and then traded on an exchange. The evolution from an OTC market to an exchange-based market may present advantages, some said.

"Commodities markets fared very well in this credit crisis compared to the last credit crisis in 2001-2002, and this can be attributed to the clearing model that was adopted after Enron wherein commodities markets evolved from an over the counter to an exchange," said panelist Matthew Evans, vice-president at NERA Economic Consulting.

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