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Regulation and Compliance > Federal Regulation

More Harm Than Good

By Staff Writer

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LONDON (HedgeWorld.com)–Alan Greenspan, chairman of the Federal Reserve, speaking before the Society of Business Economists, warned that regulators might do more harm than good if they impose mandatory disclosure upon participants in markets for over-the-counter derivatives.

Chairman Greenspan compared the invention of a new derivatives product to the development of an undervalued parcel of real estate. In both cases, he said, secrecy is part of the productive process. In the case of real estate the innovative “developer makes a substantial profit and the community overall presumably benefits from the improved land use,” he added.

Likewise regulation of the OTC derivatives markets, even regulation aimed at the seemingly laudable goal of transparency, is potentially damaging “because forced disclosure of proprietary information can undercut innovations in financial markets just as it would in real estate markets,” he said.

Addressing the objection that secrecy helped foster monopolies Mr. Greenspan said, “Innovative products temporarily earn a quasi-monopoly rent. But eventually arbitrage removes the market imperfection that yielded the above-normal return. In the end, the innovative product becomes a ‘commodity’ made available to all at a modest, fully competitive profit.”

A Busy Week

These remarks, coming as the U.S. Congress considers the possible re-regulation of energy derivatives, may have been intended to provide ammunition to the opponents of such a move.

Mr. Greenspan, who has headed the Federal Reserve since 1987, was to receive an honorary knighthood from Queen Elizabeth II in recognition of his contributions to world economic stability. Then he is to fly back to Washington Thursday afternoon, in time for weekend meetings of the International Monetary Fund and the World Bank.

Those meetings will end what has been a busy week for Mr. Greenspan. On Tuesday, he chaired a meeting of the Federal Open Market Committee, which proved contentious. The FOMC decided to keep its target for the federal funds rate unchanged at 1 3/4 percent. But, in a rare move, two Governors wanted their dissent from this decision noted for the record.

The dissenters, Edward M. Gramlich and Robert D. McTeer, Jr., said they preferred a reduction in the target for the federal funds rate.