Statement of the Financial Economists Roundtable * Reforming the OTC Derivatives Markets

In investigations of the causes of the crisis, a major focus has been the role of derivative securities, particularly credit‐default swaps (CDS). Despite widespread claims to the contrary, however, the 51 economists who signed this statement begin by asserting that CDS and other derivatives contracts were not a primary cause of the financial crisis. At the same time, derivatives markets are said to play an important economic role by shifting risks from businesses and individual investors to parties more willing (and generally better able) to bear them. But, as illustrated during the crisis, derivatives also can be used to transmit risk in ways that have the potential to pervade the entire financial system. With the aim of limiting systemic risk associated with the use of derivatives, the statement recommends the following:•  measures that encourage migration of more derivatives transactions to central‐clearing facilities, including higher capital requirements and stricter criteria (including segregation) for the collateralization of positions that are not cleared; •  data reporting and repository requirements designed to help regulators and market participants to understand systemic risk exposures in the financial system; •  post‐trade price transparency for all sufficiently standardized OTC products; •  continued migration of trading in actively traded OTC products to exchanges.Finally, although the economists support regulations against market manipulation, they oppose potential restrictions on speculative trading, including the holding of “naked” CDS, while affirming that both hedging and speculation are important and socially beneficial activities in our financial system.