I started a discussion topic (below) last week on Linkedin regarding the efforts by the Obama administration to impose new regulations on derivatives. Specifically, the discussion was centered on how the new regulations may impact the OTC weather derivative market.
WASHINGTON — In its first detailed effort to overhaul financial regulations, the Obama administration on Wednesday sought new authority over the complex financial instruments, known as derivatives, that were a major cause of the financial crisis and have gone largely unregulated for decades.
Following is a comment posted from Arthur Small, Associate Professor of Applied Economics and Finance, Department of Meteorology, Penn State University regarding his efforts at communicating with senate staffers on the issue.
I requested a meeting with several members of the Senate Agriculture Committee staff to discuss Harkin's bill. Graciously, they agreed to meet with me. I argued, in short, that, "If OTC trading is outlawed, only outlaws will trade OTC." More substantively, I argued that banning OTC trading would both eliminate economically useful risk hedging instruments, and would serve to drive risk-transfer agreements off-shore and "underground," into commercial contracts. I argued that, to understand, monitor and manage systemic risk, the real need was to give regulators better data, and better tools for data analysis. In that vein, I'm working with colleagues on a proposal to establish a National Institute of Finance: more at www.ce-nif.org.
I don't think I necessarily convinced anyone (and in any case, they aren't the final decision-makers). That said, I would tend to agree with James' comment that the conversation in DC on restructuring financial regulation seems not to be focused on banning any particular types of contracts. The Obama plan does not include such bans. Nor did any member of the Senate Banking Committee suggest, during Tim Geithner's testimony, that it should. One should stay vigilant, I suppose, because strange things can always happen. But I expect that when the dust settles OTC trading of Wx derivative contracts will be safe."
-- Arthur Small, Penn State University
A minor correction/clarification on my last comment: the Obama Administration's plan does call for moving all "standardized" contracts to exchanges and clearinghouses. The plan allows for OTC trading of "customized" contracts, however. The plan does not rigorously clarify the distinction between "standardized" and "customized" contracts. This ambiguity is a point of contention for Sen. Harkin.
More to come on this topic.
Weather risk professionals: your thoughts?



