Recommendations to Encourage Global Market Participation on Emerging Derivatives Markets

1
Recommendations to Encourage Global Market
Participation on Emerging Derivatives
Markets???????????????????
Presentation by ??? Gary DeWaal, General
Counsel and Director of Legal and Compliance,
Fimat Group ????????????????? Adjunct Professor
of Law, Brooklyn Law School ????????????? 11
August 2005 Beijing, PRC ??????????????
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Effective Markets????

• Derivatives markets flourish where
• ???????,????????????
• products are well designed and are deemed by
  market participants to provide good hedging
  opportunities
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• 2. price discovery is fair and transparent, and
  there is adequate liquidity
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• 3. there are effective rules prohibiting market
  offenses (for example, manipulation) and
  fraudulent practices, as well as governing market
  operations the rules are applied and enforced
  impartially and there is a fair means to
  adjudicate disputes and
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  ???????????????
• there is an effective settlement and clearing
  system.
• ?????????????

3
Well Designed Products??????

• Derivatives products are well designed when
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• There is predictable correlation between prices
  in the cash and derivatives markets
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• 2. at contract expiration there is convergence
  between the derivatives product and cash market
  price and
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• if a product is physically delivered, the
  delivery method is sufficiently robust to
  minimize the likelihood of an effective
  manipulation.
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• consider cash vs. physical settlement
• ???????????
• if physical settlement, anticipate manipulative
  conduct
• ???????,?????????

4
Transparency???

• Price discovery is fair and transparent when
  prices
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• 1. Reflect supply and demand
• ???????
• 2. are determined, whether through open outcry or
  an equivalent electronic bidding process, or
  through application of a fair and impartial
  algorithm, through a system that is predictable
  and verifiable
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• limit the advantages to insiders
• ???????????
• require and enforce a robust audit trail
• ????????????
• if electronic, has robustness and redundancy and
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• are rapidly mass disseminated.
• ???????????

5
Liquidity???

• Derivatives markets are liquid when
• ???????,???????????
• Hedgers are confident they can enter and exit the
  market with minimum slippage
• ????????????????
• large orders can be accommodated with minimum
  slippage
• ??????????????
• this might mean allowing large orders to be
  executed off exchange and
• ???????????????
• open interest builds up robustly through a
  contracts term and normally declines only as
  contract expiration approaches.
• ??????????????,??????????????

6
Effective Rules and Enforcement???????

• Rules are effective when
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• Market participants believe the game is fair
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• they are clearly written and publicly
  disseminated
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• official translation reasonably reflects native
  language
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• they prohibit classic offenses for example,
  fraud and manipulation
• ???????????????????????
• retail participants require separate customer
  protection rules be careful to apply on a
  limited scope (for example, do not capture
  hedgers in rules to protect small speculators)
• ????????????????????,???????????(??,?????????????
  ???????????)

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Effective Rules and Enforcement???????

• they are fairly applied
• ??????
• no perceived or actual discrimination against
  outsiders (vs. insiders) or
• foreigners (vs. nationals) and
• ???????????????(????????)?????(????????)?
• 5. there are effective means to adjudicate
  disputes impartially.
• ???????????????

8
Settlement and Clearing?????

• Settlement and clearing is effective when
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• Trades end up in their proper homes
• ??????????????
• the system must accommodate the international
  practice of bifurcating execution and clearance
  and permit the use of omnibus accounts and
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• defaults of clearing members do not disrupt the
  marketplace
• ??????????,?????????
• Typically requires
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• daily mark to market of all open positions and
  the assessment of margin and
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• methodology for dealing with clearing member
  defaults (for example, minimum capital
  requirements for clearing members initial
  guarantee fund subsequent assessments)
• ???????????????(??,??????????????????????????) ?

9
Promoting Liquidity?????

• Key to promoting liquidity is to encourage
  speculation.
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• Encouraging international participation requires
• ?????????
• ability to pay/expatriate profits
• ????/????
• reasonable requirements to participate (for
  example, submission to jurisdiction of local
  regulator requirement of disclosure of basic
  information) and
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• adoption of international standards.
• ???????
• 2. Speculation is not bad. Excesses in
  speculation are bad.
• ??????,?????????

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Promoting Liquidity?????

• To encourage, do not prohibit speculation even
  when prices move adversely to national interest.
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• of course, sometimes, prices will dramatically
  increase or decrease! If this is a concern, adopt
  clear rules that authorize market pauses or halts
  in trading.
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• Do not create inadvertent impediments (for
  example, high fees or taxes).
• ?????????? (?????????)?

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Anticipating Manipulation???????????

• Techniques to minimize the risk of manipulation
• ????????????????
• Large trader reporting
• ??????
• Require brokers to report clients who maintain
  positions in excess of certain levels omnibus
  accounts must also report such clients (and
  omnibus accounts of omnibus accounts).
• ??????????????,??????????????,???????
• Regulators must have the ability to aggregate
  clients who maintain positions at different
  brokers
• ??????????????????????

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Anticipating Manipulation???????????

• consider imposing position limits can use an
  own or control standard
• ????????????????????
• will encourage over the counter financial
  engineering if too severe
• ?????,???????????
• 3. effective enforcement and private rights to
  action and
• ??????????????
• jawboning (i.e., persuasion by the regulators).
• ??(??????????)?

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Conclusion??

• Market participants determine the success of
  markets.
• ?????????????
• Speculation is important.
• ??????????
• Prices someday will move dramatically in a manner
  adverse to perceived national interests. Outright
  bans and prohibitions or unexpected changes in
  rules are not the way to deal with market
  distortions.
• ??????????,???????????????????,???????,??????????
  ??????
• Anticipate manipulation by adopting an early
  warning system of large trader reporting and
  possibly position limits.
• ????????(???????????????),????????????

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Conclusion??

• Ultimately. the market must be, and must be
  perceived to be, fair. That being said, one
  size of regulation does not fit all national
  exchanges should respond to local concerns and
  needs, and adopt rules that reflect this.
  However, accommodate international business by
  ensuring that rules are consistent with
  well-established international business methods!
• ??,????????,?????????????,??????????????,????????
  ??????????????,??????????,????????,???????????????
  ????????

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Questions???