This needs practically no narrative. We’re in a hurry, so that’s convenient:
Federal Reserve Press Release dated October 20, 2009
The Federal Reserve Board on Tuesday announced the appointment of Patrick M. Parkinson as director of the Division of Banking Supervision and Regulation, effective immediately.
The division develops regulatory policy and oversees the supervision of state member banks, bank and financial holding companies and their non-bank subsidiaries, and U.S. branches and agencies of foreign banking organizations.
An economist and senior adviser in the Board's Division of Research and Statistics, Parkinson served as the division's deputy director. In that role, Parkinson oversaw the micro-financial functions of the division and played a leadership role throughout the Board and the System on issues relating to financial regulation. Parkinson served as the Chairman's principal staff adviser on issues considered by the President's Working Group on Financial Markets [Plunge Protection Team] from 1993-2008.
Testimony of Patrick M. Parkinson
Associate Director, Division of Research and Statistics
On modernization of the Commodity Exchange Act
Before the Subcommittee on Risk Management, Research, and Specialty Crops, Committee on Agriculture, U.S. House of Representatives
May 18, 1999
The Board believes that the application of the CEA to the trading of financial derivatives by professional counterparties is unnecessary. Prices of financial derivatives are not susceptible to, that is, easily influenced by, manipulation. Some financial derivatives, for example, Eurodollar futures or interest rate swaps, are virtually impossible to manipulate, because they are settled in cash, and the cash settlement is based on a rate or price in a highly liquid market with a very large or virtually unlimited deliverable supply. For other financial derivatives--for example, futures contracts for government securities--manipulation of prices is possible, but it is by no means easy. Large inventories of the instruments are immediately available to be offered in markets if traders endeavor to create an artificial shortage. Furthermore, the issuers of the instruments can add to the supply if circumstances warrant. This contrasts sharply with supplies of agricultural commodities, for which supply is limited to a particular growing season and finite carryover.
In addition, professional counterparties simply do not require the kind of investor protections that the CEA provides. Such counterparties typically are quite adept at managing credit risks and are more likely to base their investment decisions on independent judgment. And, if they believe they have been defrauded, they are quite capable of seeking restitution through the legal system. Nor is there any obvious public policy reason to foster direct retail participation in financial derivatives markets.
In the Board's view, then, significant changes in the CEA are appropriate and the time to make those changes is in the next CFTC reauthorization. In the case of privately negotiated derivatives transactions between institutions, the Board has supported exclusion of such transactions from coverage under the CEA in the past and continues to do so. In these markets, private market discipline appears to achieve the public policy objectives of the CEA quite effectively and efficiently. Counterparties to these transactions have limited their activity to contracts that are very difficult to manipulate. A global survey conducted by central banks and coordinated by the Bank for International Settlements revealed that, as of June 1998, 97 percent of OTC derivatives were interest rate or foreign exchange contracts. The vast majority of these OTC contracts are settled in cash rather than through delivery. Cash settlement typically is based on a rate or price in a highly liquid market with a very large or virtually unlimited deliverable supply--for example, LIBOR or the spot dollar-yen exchange rate.
Okay, that was over ten years ago. Here’s what he thought in 2005:
Testimony of Patrick Parkinson
Deputy Director, Division of Research and Statistics
Commodity Futures Modernization Act of 2000
Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
September 8, 2005
The Federal Reserve Board believes that the CFMA has unquestionably been a successful piece of legislation. Most important, as recommended by the President's Working Group on Financial Markets in its 1999 report, it excluded transactions between institutions and other eligible counterparties in over-the-counter financial derivatives and foreign currency from regulation under the Commodity Exchange Act (CEA).1 As the Working Group argued, regulation of such transactions under the CEA was unnecessary to achieve the act's principal objectives of deterring market manipulation and protecting investors. Such transactions are not readily susceptible to manipulation and eligible counterparties can and should be expected to protect themselves against fraud and counterparty credit losses. Exclusion of these transactions resolved long-standing concerns that a court might find that the CEA applied to these transactions, thereby making them legally unenforceable. At the same time, the CFMA modernized the regulation of U.S. futures exchanges, replacing a one-size-fits-all approach to regulation with an approach that recognizes that the regulatory regime necessary and appropriate to achieve the objectives of the CEA depends on the nature of the underlying assets traded and the capabilities of market participants. Together, these provisions of the CFMA have made our financial system and our economy more flexible and resilient by facilitating the transfer and dispersion of risk. Consequently, the Board believes that major amendments to the regulatory framework established by the CFMA are unnecessary and unwise.
And, more recently:
Patrick M. Parkinson, Deputy Director, Division of Research and Statistics
Before the Committee on Agriculture, U.S. House of Representatives
November 20, 2008
As noted in my earlier statement, supervisors have worked with market participants since 2005 to strengthen the infrastructure of credit derivatives markets through such steps as greater use of electronic confirmation platforms, adoption of a protocol that requires participants to request counterparty consent before assigning trades to a third party, and creation of a contract repository, which maintains an electronic record of CDS trades. Looking forward, the most important potential change in the infrastructure for credit derivatives is the creation of one or more central counterparties (CCPs) for CDS. The Federal Reserve supports CCP clearing of CDS because, if properly designed and managed, CCPs can reduce risks to market participants and to the financial system. In addition to clearing of CDS through CCPs, the Federal Reserve believes that exchange trading of sufficiently standardized contracts by banks and other market participants can increase market liquidity and transparency and thus should be encouraged.
Policy discussions of potential regulatory changes for CDS have focused on preventing market manipulation, improving transparency, and mitigating systemic risk. Manipulation concerns can be addressed by clarifying the Securities and Exchange Commission's (SEC) authority with respect to CDS. Data from a contract repository provide a means for enhancing transparency, a topic I will discuss in greater depth later. To better contain systemic risk, prudential supervisors already have begun to address the weaknesses of major market participants in measuring and managing their counterparty credit risks. This step is fundamental to containing systemic risk because it helps limit the potential for any single large market participant to be the catalyst for transmission of such risk.
All said without a hint of contrition or irony. Nice.