Responding to the threat of regulation, the International Swaps and Derivatives Association this week issued a new position paper that attempted to shoot holes in a Congressional study.

The New York-based association said the General Accounting Office's recent report made unjustified assumptions about the risks in the derivatives market.

"Anecdote, conjecture, and surmise are not sufficient bases for imposing restrictions on an essential risk-management tool," the association's paper said.

Mark Brickell, the head of the derivatives strategy group of J.P. Morgan & Co. and a vice chairman of the association, acknowledged that he GAO had provided some useful information. "The problem," he said, "is that the data presented doesn't always support the conclusions."

False Conclusion Seen

According to the association's paper, the premise of the GAO report - that interdealer credit concentration poses a serious threat to financial markets through a potential "domino effect" - is based on a false conclusion about interdealer credit exposure.

In fact, the GAO report cites a survey of 14 leading U.S. dealers that indicates just the opposite: At the end of 1992, their exposure to other U.S. dealers arising from over-the-counter derivatives transactions was less than 11 percent of their total net credit exposure.

"They have seized on the notion that counterparties are linked in a new way," Mr. Brickell said. "The linkage is credit risk and it is not a particularly big one. We get more exposure out of our interbank loans, for example."

The swaps dealers association said that the GAO report contains good information and useful suggestions for improvements in the $16 trillion global derivatives market.

Study Called Important

Indeed, the association helped the GAO prepare the report by providing statistical analysis culled from its membership, said Frederick R. Medero, executive director of the association. The study "makes an important contribution to the growing body of knowledge about privately negotiated derivatives," he said.

"The report provides a clearer picture of the ways in which derivatives are used by corporations, investors, financial institutions, and governments to manage the inherent risks of their daily operations."

He also said the association agrees with the GAO's conclusion that effective risk-management practices are important to both dealers and end users of derivatives.

Risk-management practices developed for derivatives, said Mr. Medero, have led to improvements in financial-risk management in general.

But the association emphasized the report's weaknesses in analysis.

"The GAO report quite rightly identifies areas in which these shortcomings largely concern financial instruments generally, rather than derivatives specifically," the paper said.

The swaps dealers' fear is that end users of their product may wind up subject to unfair and needless regulation if the GAO's recommendations are followed.

"There is a widely held view that there is no need for legislation," said Mr. Brickell. "If burdens are placed on our activities that make us less efficient, we'll lose clients to the competition. One of our biggest concerns is that we'll be less able to serve our clients."

Agency to Reply

A source at the GAO said it was the association, not the GAO, that had reached invalid conclusions. The agency will reply next week, he said.

Responding to requests from Congress, the GAO is preparing a follow-up study, focusing on the risks to municipalities of derivatives investment. Some state and local finance officers have complained that they were being pressured into using derivatives."

"You do a two-year study that concludes you have to do another one. It doesn't make sense," Mr. Brickell complained. "It just wastes the taxpayers' money."

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