The day after November 7, 2012 at 10:48 am

First, and most important, congratulations to the folks to the West on their good judgement. Obama was unimpressive in his first term, but the alternative was plain scary. Maine and Maryland voted for gay marriage, Washington and Colorado for legal pot, and Elizabeth Warren was elected which should make for interesting Senate banking committee hearings. Good show.

Second, a report from the cutting edge of bad supervisory judgement. I went to a conference yesterday which started very well, but ended up about as scary as Romney’s economic policy. Why? Because a regulator from a minor European country (but who nevertheless is apparently influential at ESMA) suggested that it was official policy to substantially reduce the size of the OTC markets in general, and the inter-dealer market in particular. In other words, he didn’t toe the usual line of `we will do what is necessary for stability, and the markets will adapt as they may’ but intimated that some supervisors HAD THE EXPLICIT POLICY OBJECTIVE of reducing OTC derivatives trading. Now many have had that suspicion (and taken a variety of views on whether it was a good thing or not). But for a regulator to actually say that in public is outrageous — and it should be career ending. Do supervisors really want to take on the mantle of directing what instruments are traded, rather than saying what capital (& liquidity etc.) they should attract if they are traded? Do they want to take direct responsibility for the job losses at UBS, RBS and all the rest? Do they really claim to have such god-like understanding that they can impose massive change on the markets without bothering to conduct an impact study and without listening to serious, thoughtful objections from leading market participants? Because if they do, a number of people (myself included) will be noting those decisions and holding the supervisors responsible for their consequences. A politician can stand on a platform of financial reform and, if they win, they can do what they promised; Dodd/Frank thus has political legitimacy, whatever you think of it. But if unelected regulators formulate a policy that both goes far beyond what politicians have agreed and will have profound macro-economic consequences, something is very wrong.

Update. Thanks to FT alphaville, who picked this up, and Risk, who put the full story on line (albeit behind a firewall), the details have now come out. I wasn’t sure if this meeting was under the Chatham House rule so I wanted to err on the side of prudence, but now I don’t have to. My personal view is that the supervisor concerned was probably trying to provoke rather than articulating an honest appraisal of policy, but that hardly matters. Either he was mis-representing his central bank, which I would have thought was something that would be career threatening, or he was revealing where the CBI (and perhaps ESMA) really stand, in which case some serious questions need to be asked of the Governor.

11 Responses to “The day after”

  1. No great surprise here. See, for example, http://www.bis.org/speeches/sp100616.htm

  2. Thanks – that’s terrifying.

  3. I wonder if this is another example of policy makers realising that their models are just as rubbish as those of the regulated and they have even less of an idea where the risks are. So the response is to “super-safe” the system by just asking for more and more and more resilience, rather than work harder to sort their models and improve their understanding.

  4. [...] at Deus Ex Macchiato = disturbed: I went to a conference yesterday which started very well, but ended up about as scary as [...]

  5. It is official policy, at least for standardised OTC contracts:
    “All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Noncentrally cleared contracts should be subject to higher capital requirements”
    G20 official statement Pittsburgh, september 2009

  6. If it’s who I think it is (did he say that OTC regulation would “Only Take A Minute”?) then he is certainly influential and was canvassed as a chief exec for ESMA ISTR, but he’s quite far out on a limb on this one and he’s been notorious for years for having an inexplicable hostility to OTC markets.

  7. jck – Respectfully, no. The G-20 document says basically if you do some things, then have to clear them. That’s fine. What they don’t say is that we don’t want you doing them at all. The G-20 doc (and B3 and everything else) says you can do as much as you want provided you clear what you must, you have enough capital, pay your margin etc. That’s very different from having the policy of reducing the size of the OTC market, or wanting people to turn swaps into futures.

  8. You have a point, it’s not an EXPLICIT policy objective, as the regulator said.

  9. [...] at Deus Ex Macchiato = disturbed: I went to a conference yesterday which started very well, but ended up about as scary as [...]

  10. Cecchetti strikes again (p6): http://www.bis.org/speeches/sp121030.pdf

  11. [...] of regulatory hubris, David at Deus ex Macchiato is justifiably outraged at the assertion by an Irish regulator that global regulat…. ┬áBecause of course regulators know exactly how big OTC derivative markets should be and know with [...]