When looking to place blame, victims of the credit crunch first singled out mortgage-backed securities, then short-selling and now the derivatives market, specifically that for credit default swaps.
David Gershon, the CEO of SuperDerivatives, says regulators could take simple steps to prop up consumer confidence in the OTC derivatives market. First establish external firms to provide valuation services.
“Of course it would be good if listed companies had to use an external service for valuation,” Gershon says.
He describes most of the firms currently called “valuation services” as little more than “just some guys that take some models from textbooks, get data from Bloomberg and call themselves a valuation service.”
Instead, regulators should certify companies before they can offer valuation services for derivatives, by proving that their models are accurate and near real market prices.
“There’s no point just to say that someone gave you an external valuation. Most of them use general models that don’t get close to the reality,” Gershon says.
He asserts that SuperDerivatives can provide such a service.
“At the moment, all the standard models don’t work in this environment. Our models are still spot on in generating market prices,” he says.
He also says it was important to differentiate between those derivatives that have caused turmoil and those that are much more transparent, such as currency exchanges.
“Realistically, the problem is really in the credit derivatives and the mortgage-backed securities side,” Gershon says.
Government officials have called for tighter regulation of the derivatives market, including European Commissioner Steve McGreevy. When asked whether he agreed with Commissioner McGreevy’s comments – that central clearing and standardized trading would help the market – Gershon dismissed his statements. He said it’s easy for outsiders to call for such action without recognizing that the nature of derivatives prohibit all-inclusive regulation.
“I’m sceptical that people will really regulate the market. I think there will be some new regulation, but I don’t think they will go very deeply. Once the dust settles, the need for regulation will decrease,” he said.
And though Gershon predicts that investors will avoid any toxic assets for the next two or three years, he says the long-term outlook is generally positive.
“In two years, it will be big business as usual,” he said.