Greenspan Urges Congress to Exempt OTC Derivatives From U.S. Regu lation

[Seth Ackerman]

Wall Street Journal - February 11, 2000 	 <<...>> 	
Greenspan Urges Congress to Exempt OTC Derivatives From U.S. Regulation 
By JOSEPH REBELLO and DAWN KOPECKI
Dow Jones Newswires 
WASHINGTON -- Federal Reserve Chairman Alan Greenspan urged Congress to act
quickly to exempt the $80 trillion over-the-counter derivatives market from
government regulation, saying legal uncertainty is posing "unacceptable
risks to the country's financial system." Testifying before the Senate
Agricultural Committee, Mr. Greenspan endorsed recommendations of a White
House panel on OTC derivatives. He was joined by other members of the
president's working group on financial markets, including Treasury Secretary
Lawrence Summers and Commodity Futures Trading Commission Chairman William
J. Rainer. "I see a real risk that, if we fail to rationalize our regulation
of centralized trading mechanisms for financial instruments, these markets
and the related profits and employment opportunities will be lost to foreign
jurisdictions that maintain the confidence of global investors without
imposing so many regulatory constraints," Mr. Greenspan said. Mr. Summers
told lawmakers that the legal uncertainty over the instruments, which are
used primarily by institutional investors, can't be cleared up without
legislation. The OTC derivatives market, he said, offers important benefits
to the U.S. economy by allowing investors to hedge their risks efficiently
and pass on the benefit of lower costs to consumers and businesses.

	The working group recommended in November that Congress forbid the
regulation of most of the OTC derivatives market and specifically bar the
CFTC from regulating the instruments. It did, however, leave open the
possibility that "limited" regulation may become necessary in the future.
The legal status of OTC derivatives was cast into doubt in 1998 when the
CFTC suggested it had the right to regulate trading in those instruments
under the Commodity Futures Trading Commission Act of 1974.
"Over-the-counter derivatives have come to play an exceptionally important
role in our financial system and our economy," Mr. Greenspan said. "These
instruments allow users to unbundle risks and allocate them to the investors
most willing and able to assume them." Under the circumstances, he said, it
is essential that Congress remove the legal cloud hanging over the
instruments. "The legal uncertainties create risks to counterparties in OTC
contracts, and indeed, to our financial system, that are simply
unacceptable," Mr. Greenspan said. "They have also impeded initiatives to
centralize the trading and clearing of OTC contracts, developments that have
the potential to increase efficiency and reduce risks in OTC transactions."