MFA Blog Post Reports That Increased Transparency Rules Worry Hong Kong Regulators
According to an MFA blog post and Wall Street Journal news item, global rules that were designed to increase transparency in the swaps market worry the Hong Kong Monetary Authority.The new rules, which took effect earlier this month in the U.S., push derivative trades through central clearing houses and trade repositories. According to the blog post, the new rules would impact liquidity in Asia unless regulators agreed on a measure to make rules workable for their markets. Howard Lee, Executive Director of Monetary Management for the Hong Kong Monetary Authority, urged global lawmakers to phase in the new rules gradually in order to avoid adverse impacts on the swaps market. More particularly, he stated that, "Failing to address these challenges may make it impossible to conduct these transactions in this region, resulting in the withdrawal of liquidity and market fragmentation, which wouldn't be conducive to strengthening financial stability." The blog post reports that Hong Kong regulators are working with global counterparts to minimize the impact of new rules, but no measures have been agreed upon.
Lofchie Comment: Several days ago, we commented to the effect that, while the CFTC asserted that one of its accomplishments was an increase in "transparency" in the swaps markets, we did not see any reason why this increased transparency should result in greater financial market stability, particularly as the Federal Reserve Board was completely unable to foresee the recent market crisis, notwithstanding its access to the relevant information. (See related story and comment linked below.) Now we have a more negative comment from the Hong Kong regulators indicating that increased transparency might have affirmatively negative effects.Not all regulations produce the desired outcome or even a positive result. As more and more regulations are piled onto the markets, it will at some point become obvious that some regulations in fact have a negative effect. Accordingly, it is incumbent upon the regulators to explain the method by which they believe regulations will lead to a good result and, if such good result cannot be demonstrated in advance, the method should be subject to back-testing.
Click here to view the blog post in full (links externally to MFA website).Related News: "CFTC Issues Staff Guidance on Swaps Straight-Through Processing (with Delta Strategy Group Summary)" (September 27, 2013); "ISDA Publishes Year-End 2012 Market Analysis: Portfolio Compression and Central Clearing Continue to Impact Size of OTC Derivatives Market" (June 20, 2013).