The growing use of derivatives has not created significant new risks to the financial system, according to a study released yesterday by the Group of Thirty, a prominent group of industry participants worldwide.
The study is the latest contribution to the ongoing debate over the use and regulation of derivatives. It was written by securities dealers, bankers and users of derivatives such as McDonald's Corp.
Several other studies are expected later this year from the Securities and Exchange Commission, the Commodities Futures Trading Commission, and the General Accounting Office.
"Derivatives by their nature do not introduce risks of a fundamentally different kind or of a greater scale than those already present in the financial markets." the study notes. "Systemic risks are not appreciably aggravated and supervisory concerns can be addressed within present regulatory structures and approaches."
The study makes 24 general recommendations for regulators and market participants and presents a statistical portrait of the current market. Most of the study's recommendations are geared to improve industry practices.
Only four of the broad recommendations are directed to financial market regulators, and they do not touch on some of the most contentious issues now under discussion by the regulators.
"As private participants in derivatives activity, the authors of the study deliberately intruded little on the domain of the regulators," said Paul Volcker, the former chairman of the Federal Reserve and the current chairman of the Group of Thirty, in a forward to the study.
For example, regulators are considering the imposition of minimum capital requirements on financial institutions active in derivatives. But the Group of Thirty study makes no recommendations about minimum capital standards.
Such standards could reduce the impact on the market of a major derivatives player going bankrupt, but they could also hurt the market by raising the cost of derivatives transactions.
The recommendations for regulators would harmonize accounting standards to provide adequate disclosure of derivatives activity, encourage the use of netting agreements, provide legal certainty for swaps transactions, and insure derivatives are taxed, in a logical and consistent manner.
A regulatory official working on one of the upcoming studies praised the Group of Thirty's work. "I think they have presented us with some important concepts to keep in mind, and that can't help but influence us," the official said.
Some industry officials familiar with the study said that after the various government studies were announced last year. they became concerned that their point of view would not be heard.
"The [Group of Thirty) study was done to ensure that the voices of doom and gloom were not the only voices out there," one Wall Street official said.
But officials who worked on the Group of Thirty study said it was not done to oppose other studies.
"It was not a response, but a contribution to the discussion," one of the authors said in an interview this week. "We recommended principles of good management for financial risk that could be broadly useful to a wide range of institutions. The risks here are the same risks which exist in more traditional products.