Reply #6: Financial reform is flawed, says CBOE chief

[Demeter]

http://www.ft.com/cms/s/0/e610848a-ef2a-11de-86c4-00144feab49a.html

US lawmakers are putting “undue political pressure” on regulators to tighten oversight of trading practices that had little to do with the financial crisis, while the bigger issues of systemic risk are not being adequately addressed, the head of the US’s biggest options exchange has warned.

In an interview with the Financial Times, Bill Brodsky, chief executive of the Chicago Board Options Exchange, said the debate on Capitol Hill over reforming financial regulation had focused on the wrong issues.

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“There are micro-market structure issues – flash orders, short-selling, high-frequency trading – that are being wrapped up into financial regulatory reform in a way that has a lot of political overtones,” he said. “This is something regulators should be dealing with without undue political pressure from Congress.”

The Securities and Exchange Commission has proposed banning flash orders – when exchanges allow traders’ computers to glimpse share order flows a fraction of a second before the broader market. The biggest options exchanges have lobbied for an exemption, saying flash orders give customers better prices and save them from paying fees at rival venues.

Mr Brodsky said Mary Schapiro, SEC chairman, had only proposed the ban after receiving a “very vociferous letter” on the issue from Charles Schumer, a powerful Democratic senator and member of the Senate Finance Committee.

Mr Brodsky said focus on these smaller issues had come at the expense of what should be the main thrust of efforts to overhaul the US financial system. He said legislation passed by the House of Representatives this month failed to tackle the problems.

“The central question is: what has this bill done to address systemic risk?

“I’m sceptical that the right questions are even being asked. What’s happened is that a lot of the big banks have rounded up their end-users to say: ‘Everything’s fine and don’t change anything.’ If everything’s fine, why were we at the brink of a disaster 1½ years ago and what’s changed?”

Industrial companies have lobbied Congress hard for exemptions to posting margin requirements on over-the-counter derivatives, without which they say they would be hampered from creating jobs and contributing to the economic recovery in the US.

Mr Brodsky said such exemptions were problematic. “The end-users get their financing from the banks that provide the derivatives.

“So if you exempt the end-users, what are you doing about the capital of the banks, the margin they have to post?”