(Adds comments from interview, CFTC official's comments)
By Ann Saphir
CHICAGO, Sept 3 Regulators should make sure
that dealers with billions of profits at stake do not block
over-the-counter derivatives from being moved into
clearinghouses, the head of a leading U.S. hedge fund firm said
Failure to write rules to implement Wall Street reform in a
way that forces most of the $615 trillion market through
clearinghouses could expose financial markets to future crises
like that of 2008, said Kenneth Griffin, CEO of Citadel
Investment Group, Chicago's biggest hedge fund operator.
"Today's status quo is simply unacceptable," Griffin told a
symposium on clearing held at the Chicago Federal Reserve
Clearinghouses guarantee trades through the mutual backing
of members and are seen as a way to reduce risk in a market
blamed for accelerating the credit crisis made worse by the
failure of Lehman Brothers, among others.
If Lehman Brothers' derivatives portfolio had been cleared,
as mandated under the new law, the swaps could have been
disposed of the next day, Griffin said in an interview on the
sidelines of the symposium.
"Even the least liquid assets will trade when the
clearinghouses go to liquidate them," he said.
As it was, many of the swaps Lehman defaulted on took weeks
to wind down, and the aftershocks of that failure still
Dealers, who currently control the over-the-counter market
by structuring contracts, making markets and executing trades,
view clearing as a threat to their profits, Griffin said.
Now that they have lost the battle to keep derivatives out
of clearinghouses entirely, they are putting up resistance to
expanding membership in clearinghouses beyond their ranks, he
Dealers make an estimated $60 billion in profits from the
OTC market as it currently stands. Those profits are "certainly
in the minds of the dealers worth protecting, worth fighting
tooth and nail," Griffin said.
IntercontinentalExchange Inc (ICE.N) and London-based
LCH.Clearnet only allow dealers to participate in their
credit-clearing and interest-rate-swaps clearing offerings.
"There's no effective way for customers to participate in
that today," Griffin said. "And that's part of the issue here,
is that they've built a closed architecture that the eight or
nine largest dealers enjoy the benefits of."
The Commodity Futures Trading Commission plans to propose
new rules on over-the-counter clearing before the end of the
Ananda Radhakrishnan, director of CFTC's division of
clearing, told the symposium earlier on Friday that
clearinghouses must make decisions about membership in the
He also said he would like to see exemptions for end users
-- companies that use the swaps market to hedge risks incurred
in the course of business -- to be as narrow as possible.
Speaking on the same panel, Thomas Deas Jr., president of
the National Association of Corporate Treasurers, said that
forcing end-users would raise costs and result in job losses.
That argument is "simply false," Griffin said.
End-users who use the swaps market are paying the same
total cost they would if the swaps were cleared, but the price
is embedded in the cost of the transaction, while with clearing
the price is transparent, he said.
(Editing by Paul Simao)