What role should derivatives play in a reformed financial services marketplace?

I have yet to see much intelligent discussion on the topic and was really disappointed that the FT, in a full page article, resorted to a simple comment from a market participant and never sought other opinions:

“Forcing OTC products on to exchanges … would result in increased risks and costs for end users,” says Mr Clark of the WMBA, which says British pension funds have saved themselves £40bn recently by hedging with derivatives. Or as Anthony Belchambers, head of the Futures and Options Association, says: “This kind of regulatory pressure will distort free-market competition and restrict product diversity.”

Really? Could they get along without the swaps? How does the $40 billion in alleged savings compare to the global market losses in the last two years, and are they related?

In the meantime, bankers in London are preparing to exploit any transatlantic regulatory gaps. “Only 25 per cent of all OTC trading actually happens in America,” one senior London-based banker says. “So we don’t think what Geithner says is going to change anything for us … and even if [Brussels] does the same, activity will just go to Singapore or Switzerland instead.”

Between Warren Buffet’s description of derivatives as weapons of mass financial destruction and ISDA’s assurances that the world wouldn’t be safe or profitable without them is plenty of scope for deeper evaluation. Where it is apt to come from is the issue.

Filed under: Technology