Independent governance of derivatives markets and clearinghouses

My, the editorials abound these days  about the wacko Dodd-Frank Act and how it will bring ruin to all of us. Now we "learn" that derivatives will move abroad if the governing boards of exchanges and clearinghouses are not controlled by their customers, i.e., if the Commodity Futures Trading Commission goes ahead and requires (as the Securities and Exchange Commission already does!) that a majority of sitting directors should be unaffiliated with the market's brokers and traders.

It seems not to matter to the critics that directors with industry ties spend - maybe - 4 hours a month in the board room but 40+ hours a week making their real bosses happy. Nor that most exchanges and clearinghouses have "gone public" so their true owners are already as unaffiliated as any CFTC-preferred director could be. Nor that the largely male boards of female products companies don't even need or use the entities' products.

True, a bad board that is clueless at each meeting does nobody (except the pleased CEO) any good. But that is easily remedied by appointing savvy directors who know when someone is blowing smoke at them or when it is time to put on those wading boots. The problem arises when a director has far more to gain from advancing his main employer's interests than from  collecting a director's fee.

Lest we forget, the over-the-counter derivatives business during the financial crisis was largely a one-stop affair. You traded with House "A" or you didn't trade at all. How nice if that could be replicated on-exchange by controlling its board. This is what Dodd-Frank recognized as a real possibility if one or a consortium of OTC dealers could wear the camouflage of an exchange and continue business as usual.

These are precautions so that derivatives are available to us as surely and as competitively as hot dogs and giant pretzels from the carts in Times Square.

Let the unaffiliated directors represent the unaffiliated shareholders. This is democracy, even outside Egypt.
But, having said that, let us remember that the exchanges as well as private self-regulatory associations are expected to be PEER review groups, passing on the conduct of their fellow colleagues. This formula assumes that users will judge users and, for this role, a panel of customers reviewing the conduct of other customers to assure high ethics is an inherent feature of the program. As long as self-regulation is embraced as an adjunct to federal oversight, the user-judging-user formula is unavoidable and proper.

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