Breaking News

Options Industry Conference Preview Part 1: Is Regulation Damaging the Options Space?

The cost of regulation is heavy on certain participants in the options industry, and OCC is trying to help clearing firms and market makers deal with it.

“One of the things we’re most focused on is the increased capital burdens of doing business in the industry, and that’s starting to have an effect on liquidity provisions and trading,” Donohue said.

By that, Donohue is referring to the risk weighted assets for bank clearing members which fall under various regulatory regimes at the US Treasury and the Basel Committee.  These issues and others will be discussed at the upcoming Options Industry Conference in Scottsdale, Arizona this week.

“We’re starting to see those calculations are really causing banks to start to throttle [their] activity,” Donohue said.

Looking back at Dodd-Frank regulation, Donohue said that overall the goal of the legislation was correct. But in his view the rules for OTC derivatives ended up getting lumped in with listed derivatives, leaving the regulators to treat all derivatives with a similar vigor.  There are now examples where cleared exchange trading costs more, as a result of regulatory rules, than OTC trades.

“There was such an emphasis on leverage in the system, and deleveraging, making sure there were more stringent capital requirements,” Donohue said. “While I support that, I think there were so many layers of capital now throughout the entire system that it’s become quite burdensome. “

Donohue said now is a good time to evaluate where we are at. He also suggested that regulators should move more toward a principles-based regulation.

“The listed markets functioned extremely well during the most recent financial crisis,” he said. “The exchanges continued to be high functioning places where you could access liquidity, and clearing houses have an unblemished record as well. It was really the over-the-counter markets where we had gridlock.”

In the meantime, Donohue said the options industry is looking for new ways to address the capital pressures on clearing firms as well as market makers. CBOE, for example, has introduced a compression service for firms that have offsetting positions that could be netted out, thus freeing up some capital. While it is still early days for that program, Donohue said it is one way the industry is trying to  create innovation to deal with such issues either by identifying certain positions for firms or helping compress positions.

“We’re thinking about ways in which we can be a better facilitator for identifying ways in which clearing member firms can reduce the capital intensity of the positions they are carrying either for themselves or their clients,” Donohue said.

0.00 avg. rating (0% score) - 0 votes

About Author

Kharouf is CEO of John J. Lothian & Co. and editor-in-chief of John Lothian News (JLN). He edits the John Lothian Newsletter, MarketsWiki and MarketsReformWiki.