The FT – still confused about systemic risk

April 20, 2010

Deep in the Financial Times there’s an editorial desk that occasionally peddles the line that industrial companies are bleating unreasonably about the threat of OTC derivatives regulation.  Their editorial today asserts that non-financial hedging should not be exempt from the requirement for central clearing under proposed new derivatives regulation and makes the fundamental error of confusing the reasons why underpricing of risk brought the financial system to its knees.

I’ve written to the FT (but they may be fatigued with hearing from me) pointing out that legislators on both sides of the Atlantic are struggling with the detail of how to deliver on the G20 commitment to regulate derivatives precisely because the creation of systemic risk – triggered in the financial crisis by underpricing of risk amongst other factors – is not attributable to derivatives transacted by non-financial end users.  Without such a justification for the inclusion of these end users the only solid foundation for the aggressive approach the FT endorses seems to be safeguarding the political skins of Congressmen and MEPs, who find the approach politically helpful even if counter to the long-term interest of their constituents.

The reality is that a regulatory outcome that forces end users into central clearing will drain huge funding from productive investment and working capital and create additional economic and employment volatility as companies reduce their hedging; it will do nothing to reduce systemic risk.  I remain optimistic that commonsense will prevail in Brussels if not in Washington.

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