(Adds comments from interview, CFTC official’s comments)
By Ann Saphir
CHICAGO, Sept 3 (Reuters) - 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 on Friday.
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 Bank.
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 reverberate today.
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 said.
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 year.
Ananda Radhakrishnan, director of CFTC’s division of clearing, told the symposium earlier on Friday that clearinghouses must make decisions about membership in the open.
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)