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.”
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