Derivatives Need Transparency to Lure Users, Hirani Says

Increased transparency in credit default-swaps will attract new users to the shrinking market, according to Sunil Hirani, co-founder and chief executive officer at trueEX, a proposed exchange for swaps.

The market structure “needs to be transformed,” Hirani said today at a Futures Industry Association conference in New York.

“Transparency will be the catalyst,” along with the ability to trade on regulated markets, according to Hirani, an architect of the credit-default swap market who co-founded Creditex Inc. While a lack of confidence in structure, increased capital for some privately negotiated contracts and a shrinking market don’t “encourage a lot of people to enter the market,” reasonable margin requirements, regulation and a “true end-of-day close” will help attract new participants, he said.

The gross notional amount outstanding of credit-default swap products has shrunk to $26.4 trillion from $33.6 trillion in 2008, according to the Depository Trust & Clearing Corp., which runs a central repository for the market. Regulators are still writing the details of the rules for the Dodd-Frank Act, the most sweeping overhaul of U.S. financial regulation since the 1930s, introduced in reaction to the financial crisis of 2008.

In 1999, with $200,000 in capital, Hirani and John McEvoy founded Creditex, an electronic brokerage for credit-default swaps that helped create the auctions that set values for corporate bonds in default. They sold it in 2008 to Atlanta-based Intercontinental Exchange Inc., the second-largest U.S. futures market, for $513 million.

Margin Requirements

TrueEx applied in January to be a designated contract market, an exchange overseen by the Commodity Futures Trading Commission. Swaps allow investors to hedge or speculate on changes in underlying assets such as interest rates, currencies or the ability of a company to repay its debt. The unregulated market is used by banks, institutional investors and corporations.

If capital requirements are too high, “the product will die,” Larry Tabb, founder of financial-market research and advisory firm Tabb Group LLC, said on the panel today. If a reasonable amount of margin is required, he said “they’ll survive.”

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