In fact, just before I left the Commission, I set up an internal staff committee to study and make recommendations to the full Commission on issues relating to developing financial OTC products. Based on those criteria, financial derivatives deserve to trade and deserve legal certainty. During my tenure at the Federal Reserve System, I came to appreciate the great potential of OTC derivative transactions as a means for banks to manage interest rate, equity, credit and currency risk. Depository institutions ultimately have developed very sophisticated risk management systems and utilize both exchange-traded and OTC instruments quite successfully. As mentioned earlier, the supervisory structure has had to be changed to accommodate this new activity.
Banks engage in derivative activities in a fashion similar to other financial transactions.
Although I recognize that some participants in the OTC derivatives market are not supervised, a large portion are and can exert market discipline through their own risk management techniques, including requiring disclosure from derivatives counterparties. In many cases, the market participants of OTC derivatives are otherwise regulated. Disclosure by unregulated OTC financial derivatives market participants should be increased so that arms length transactions are effected with adequate knowledge. Fully informed transaction opportunities maximize the effectiveness of market discipline. Thank you very much for your attention.