Sunlight may be the best disinfectant, but there can be too much of a good thing. Pending US legislation to force over-the-counter derivatives deals on to exchanges would convince some users simply to stay inside or even to seek out a more temperate climate abroad.
The impetus towards regulated exchanges stems in part from largely unjustified fears that prices, particularly for food and energy, have been manipulated. Bringing derivatives under the purview of the Commodity Futures Trading Commission and giving the agency the ability to tell exchanges when to raise margin requirements is their prescription. But the CFTC's own recent effort to enhance reporting of 22 different products has given outside experts better information to refute this canard. Most recently, the EDHEC-Risk Institute examined data for oil futures markets and detected no evidence of abnormal speculation.
Taken to an extreme, forcing all OTC positions on to US exchanges might require some $900bn in additional margin to be posted by end-users, according to lobbying groups for the oil and gas industry. This is a worst-case scenario given likely exemptions, but the cost for decidedly non-speculative companies may still be substantial. It might also cut down on flexibility by forcing companies that have used tailor-made products to use blunter instruments. And financial institutions who design these products and hedge them internally would be given the complicated task of asking customers for collateral for products that trade infrequently. Transparency is no bad thing, but the pending rules would be likely to send many customers offshore. Without some sort of global derivatives policeman, vague agreements for international oversight offer little comfort.