WASHINGTON -- The risk management systems of derivatives market participants "worked reasonably well" given the recent stress in the global financial system, Alan Greenspan, Federal Reserve Board chairman, said in a speech Friday.
The recent declines in bond and mutual fund prices "which can be viewed as an unavoidable correction-... severely tested derivatives risk management systems," Greenspan said in the speech at Wartburg College in Waverly, Iowa.
"Some firms have suffered setbacks that depressed earnings, but the announced losses to date amount to a small fraction of the capital that both regulators and counterparties require of major derivatives dealers," he said.
Greenspan said, however, that it may be too soon to draw conclusions and that more information about firms' derivatives activities, from the market and from reports and congressional hearings, will emerge in the weeks and months ahead.
Greenspan appeared to be alluding to the General Accounting Office's long-awaited derivatives report and the hearings that will be held to discuss the report.
Meanwhile, Kevin Doyle, vice president and assistant general counsel at AMBAC Indemnity Corp., told a bond lawyers meeting in Washington on Friday that more municipal issuers talk about, than do, derivatives deals.
"While about 30% of the deals we review anymore threaten to use derivatives, I'd say on the order of about only 5% to 10% actually do," Doyle said at a panel session at a meeting of the National Association of Bond Lawyers. "This seems to be a very skittish market."
David Taub, a lawyer with Rogers & Wells in New York City who was also on the panel, said that because the vast majority of derivatives are sold to institutional investors, "there has been a preference towards keeping the disclosure as brief as possible in the preliminary offering document ... and not fully disclosing or listing the terms of the products until they're actually sold." Full disclosure is included in the final offering documents, he said.
"Where these products have been marketed to retail customers, I think everyone has insisted on the full-blown disclosure in the preliminary official statement as well," Taub said.
Paul Maco, a former bond lawyer who specialized in disclosure issues and is now at the Securities and Exchange Commission, told the lawyers that he and others at the SEC want to hear from municipal market participants what derivatives disclosure practices exist and whether they are adequate.