June 8, 2009 / 11:05 AM / 10 years ago

House panel to quiz top OTC derivatives execs

WASHINGTON (Reuters) - Senior managers from some of the world’s largest over-the-counter (OTC) derivatives firms, currently accustomed to little government scrutiny, are scheduled to testify on Tuesday before a U.S. congressional panel looking into the possibilities for regulation.

As lawmakers and the Obama administration push for regulation of the OTC derivatives market, two sources familiar with an upcoming hearing said CME Group Inc (CME.O) Executive Chairman Terrence Duffy was among those invited to testify.

Others on the witness list for the House capital markets subcommittee hearing are Jeffrey Sprecher, chief executive officer of IntercontinentalExchange (ICE.N), and Thomas Callahan, CEO of NYSE Liffe NYX.N, the sources said.

It was not known which of the dozen invitees had accepted, but most were expected to make an appearance before the panel and Democratic Representative Paul Kanjorski, its chairman.

A panel spokesman was not immediately available for comment.

The hearing witness list, obtained by Reuters, also included Christopher Edmonds, CEO of International Derivatives Clearing Group, and Larry Thompson, general counsel at Depository Trust and Clearing Corp.

Also asked to testify were Robert Pickel, CEO of the International Swaps and Derivatives Association, and Don Thompson, managing director and associate general counsel at JPMorgan Chase & Co (JPM.N), a major player in derivatives.

Kanjorski announced the hearing last week. He said it was meant to “advance the discussion in Congress on derivatives and swaps regulation, especially in considering what new steps we must take to provide transparency in and meaningful regulation of this dark corner of the financial services industry.”

The OTC derivatives market, pegged at greater than $590 trillion in notional value at the end of 2008, is where trading takes place in credit default swaps and other exotic financial instruments widely implicated in the global credit crisis.

The massive, high-risk market functioned has operated for years with little government oversight, partly by design. Congress in 1990 adopted a law that protected it from too much regulation.

But many OTC derivatives flew off the rails in 2007 when the housing bubble burst and credit tightened, leaving banks, such as the now defunct Lehman Brothers, with huge losses. Credit defaults swaps played a major role in the troubles at American International Group (AIG.N) that led to its bailout.


Treasury Secretary Timothy Geithner in May called for legislation to require many derivatives to be traded on exchanges or clearinghouses, rather than over-the-counter.

Banks and dealers have opposed greater regulation, which could make it more costly to issue and trade derivatives.

Warren Buffett in 2003 famously labeled derivatives as “financial weapons of mass destruction.”

Derivatives are contracts whose value depends on the value of something else, such as a stock, bond, currency or commodity. Examples are futures, options and swaps.

Derivatives can reduce or transfer risk in such things as interest rates, currency values and commodity prices.

Exchange operators with clearinghouses — such as CME, IntercontinentalExchange and LCH.Clearnet — would win if more OTC derivatives volume moved onto their trading platforms.

Britain’s ICAP Plc IAP.L and other inter-dealer brokers such as GFI Group Inc GFIG.O could benefit if centralized clearing brings new participants into the market.

Losers could include big banks that deal in derivatives. The biggest in the market are JPMorgan, Bank of America Corp (BAC.N), Citigroup Inc (C.N) and Goldman Sachs Group (GS.N).

Reporting by Kevin Drawbaugh; Editing by Theodore d'Afflisio

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