Commodity Futures Trading Commission Chairman Gary Gensler spoke at the Chatham House in London today. The topic was a familiar one: OTC derivatives regulation. In his remarks, Gensler blamed OTC derivatives for exacerbating the 2008 financial crisis and called for a coordinated international effort in regulating these products.
Here's an excerpt:
"The 2008 financial crisis was global in nature. The financial system failed the test. The financial regulatory system failed the test. So many people in Europe and in the United States who never had any connection to derivatives or exotic financial contracts had their lives hurt by the risks taken by financial actors.
"OTC derivatives were at the center of the 2008 financial crisis. They added leverage to the financial system with more risk being backed up by less capital. U.S. taxpayers bailed out AIG with $180 billion when that company’s ineffectively regulated $2 trillion derivatives portfolio, managed from London and cancerously interconnected to other financial institutions, nearly brought down the financial system. As we later learned, much of the bailout money flowed through AIG to U.S. and European banks. These events demonstrate how over-the-counter derivatives – initially developed to help manage and lower risk – can actually concentrate and heighten risk in the economy and to the public.
"As capital and risk know no geographical boundaries, the nature of today’s marketplace demands a coordinated, international approach. We’re going to need to work closely together to reform and repair the regulatory system. The U.S. Commodity Futures Trading Commission already works very closely with the U.K.’s Financial Services Authority (FSA) to protect the public from abuses in the on-exchange derivatives marketplace."