Trying to be economical with ECON

April 26, 2010

I have been struggling to reduce to the short time allowed what I say at the European Parliament’s ECON public hearing tomorrow on OTC derivatives regulation.  The organisers asked for a written text in advance – not something I’m used to doing – but the approach does concentrate the mind on timings.

Approximately seven minutes is my allocation.  I have decided to concentrate on four self-set questions: why and how derivatives are used (by end users); can end users be linked to systemic risk and finally, should SMEs be treated any differently?

The first two questions – the why and the how of derivatives’ use – give me a chance to try to be very concise in delivering a ‘Treasury 101’ explanation; I know from much past experience that this is not always easy.

On systemic risk, I am arguing that this is an imaginary demon.  I substantiate that by pointing to: the slow speed of failure of companies as opposed to financial institutions; the absence of evidence from past large company failures that there was serious inter-connectedness; and the absence of any grounds for seeing bank failure following company failure and vice-versa.

The SME issue – the suggestion that this sector of the economy should be more favourably treated than the large company sector – seems to me to hinge on whether the argument about the linkage between systemic risk and large companies is sustainable.  Obviously I don’t believe it is and therefore see no reason to differentiate between SMEs and the rest.

The text of my speech will be posted on the EACT website after the ECON session – so it should be viewable by the close of business, tomorrow (27th April).

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