WFE Comments to IOSCO on unregulated financial markets and products

WFE Comments to IOSCO on unregulated financial markets and products

Paris, 17 June 2009 - The World Federation of Exchanges (WFE) has submitted comments to the Technical Committee of the International Organization of Securities Commissions (IOSCO), which is expected to issue recommendations on unregulated financial markets and products.  A full copy of the WFE’s response letter is attached.  William J. Brodsky, Chairman of the Board of Directors of the WFE and Chairman and CEO of the Chicago Board Options Exchange (CBOE), signed the comment letter on behalf of the Federation’s Board of Directors, and Regulation Committee.  

“The financial crisis that has unfolded over the past year and a half has exposed previously unrecognized systemic risk caused by unregulated markets and products,” Mr. Brodsky said in the letter.  “We must now all work together to develop a comprehensive regulatory framework for these over-the-counter (OTC) products that will reduce their risk and restore confidence in financial markets.”  

The WFE comments focus on four specific areas that need improvement to mitigate systemic risk in OTC markets and products:

  • Transparency – “WFE recommends that regulators have full access to all information with respect to the trading of all market participants in their jurisdiction, regardless of how trades occur.”
  • Standardization – “WFE believes that the benefits of standardization outweigh any drawbacks associated with it, and that OTC products should be standardized where feasible.”
  • Centralized Clearing – “Centralized clearing of less fully standardized products can still contribute to the reduction of systemic risk, but regulators must recognize that just shifting the risk to the clearing corporation does not eliminate it…. WFE does not recommend that standardization and central clearing be forced on all OTC instruments… Customization should be allowed, but with reporting requirements and with capital requirements that reflect the increased risks. “
  • Margin and Capital Requirements – “A fundamental contributor to the financial crisis was the expansion of leverage… It became very difficult even to place a value on products that were not traded in standardized form in a regulated marketplace… WFE strongly recommends that regulators establish capital requirements for products that reflect these risk differentials.

“The member exchanges of WFE have extensive experience in dealing with issues surrounding transparency, the development of standardized products, and the centralized clearing of products,” Mr. Brodsky wrote. “The WFE and its member exchanges stand ready to work with IOSCO, individual regulators and OTC market participants address these issues.” 

WFE is the association of more than 50 regulated exchanges around the world.  It develops and promotes standards in markets. 

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