UsableMarkets

The FT reports that the CFTC is pushing for greater transparency for derivatives. Since many derivatives are indeed traded on exchanges, what they’re really talking about here are derivatives traded OTC (over-the-counter). And really what they mean is swaps.

Swaps, for those of you with weak memories (like moi) are those things which brought AIG low and had a not small role in our recent recession. They’re also the very things which appear to be pestering Greece and consequently worries the Germans and the French.

From the FT:

“The only parties that benefit from a lack of transparency are Wall Street dealers,” Mr Gensler [CFTC chairman] told a New York derivatives conference. “Right now we have a dealer-dominated world, and that nearly drove us off a cliff.”

Transparency is generally considered a good thing for markets, so why would there be any resistance to it?

Two possible reasons come to mind:

1. Banks make money in creating swap contracts and bringing together buyers and sellers of these contracts. Placing them on exchanges means that the contracts would be standardized (bad for people who want a swap contract tailored for their needs), and, more importantly, the banks would lose business to the exchanges where these contracts would be traded.

2. Hedge funds like to keep their trades secret. Trading on exchanges makes this harder than trading OTC. And the banks have hedge funds as clients, so, naturally, they want to make their customers happy.

But, as much as the financial services industry is jealous of their profits, they’re up against some governments who are, you might say, relatively pissed off. After all, bailing out financial services industry with $700bn does tend to focus the mind. (And: AIG for $180bn; Germany’s bailout was at something like $400bn; and bailing out Greece will cost something like $27bn.)

This is not the last we’ll hear of this.

~alex