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Banking

OTC regulation threatens to shed light on Wall Street

Regulators and legislators are rattling their sabres about the demise of privately negotiated derivatives markets. End users – especially corporates – and some on the sell side are not sure they have weighed up the situation appropriately. Hamish Risk reports.

 

The rising costs of unclearable OTC derivatives trading

GARY GENSLER, CHAIRMAN of the Commodity Futures Trading Commission, tells a story about a derivatives department in an unnamed bulge-bracket Wall Street firm. The structured derivatives desk would hold regular meetings with the derivatives sales force that it sat next to on the trading floor. In the meetings they would pitch their latest structured derivatives idea.

The sales team, he says, referred to such meetings as the ‘Where’s Waldo? meetings’, alluding to the children’s cartoon book, which when opened reveals a busy two-page picture, in which young readers are challenged to find Waldo, the red-capped character, amid the crowded scene.

According to Gensler, the sales force thought it an apt comparison, because they knew that these complex structured derivatives had a lot of profits hidden in them and it would probably take them hours, if not days, to figure out where the structuring desk had put loot, even though those same colleagues were telling them to take the products to their customers.

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