Greenspan Wants `Legal Uncertainties’ on OTC Derivatives Settled

February 11, 2000

Federal Reserve Chairman Alan Greenspan wants the "legal uncertainties" surrounding over-the-counter derivatives settled. U.S. futures exchanges agreed but said they need equivalent regulatory relief.

"Imposing government regulation on a market can impair its efficiency," Greenspan told the Senate Agriculture Committee. "Thus, when evaluating the need for government regulation, one must clearly identify the public policy objectives of the regulation."

He noted the president’s working group has considered whether regulation of OTC derivatives is necessary to achieve the public policy objectives of the CEA and agreed "that such regulation is unnecessary and that such transactions should be excluded from coverage of the act."

The recommended exclusion, he added, "would extend to those securities-based derivatives that currently are subject to the greatest legal risk from potential application of the CEA." The legal uncertainties, said Greenspan, "create risks to counter-parties in OTC contracts and, indeed, to our financial system that simply are unacceptable."

Rapid changes in communications technology "portend that time is running out for us to modernize our regulation of financial markets before we lose them and the associated profits and employment opportunities to foreign jurisdictions that impose no such impediments."

The largest futures exchange no longer is the United States, said Greenspan, but in "the heart of Europe. To be sure, no U.S. exchange has yet to lose a major contract to a foreign competitor. But it would be a serious mistake for us to wait for such unmistakable evidence of a loss of international competitiveness before acting...once markets with scale and scope economies are lost, they are very difficult, if not impossible, to recapture."

Besides Greenspan and other Administration offices, the three largest U.S. futures exchanges also testified. Officials from the exchanges said derivatives legislation must give them the opportunity to compete directly with over-the-counter products. Sen. Peter Fitzgerald (R-IL) questioned over-the-counter representatives sharply over whether they would support exempting futures exchanges from regulation so that equivalent products were treated the same.

However, the committee deferred most discussion of exchange-related issues – like the longstanding ban on futures based on stock of single companies – till later, awaiting reports from regulators later this month that are supposed to shed light on the stock-futures ban and on how the Commodity Futures Trading Commission will deregulate exchanges. Several exchanges repeated Chicago Board of Trade Chairman David Brennan’s comment that new CFTC chairman Bill Rainer is "a breath of fresh air," and the tone of the hearing was markedly more relaxed than a similar gathering in 1998 when then-chair Brooksley Born clashed repeatedly and publicly with fellow Clinton Administration regulators.