Invited as an expert witness representing corporate end-users of OTC derivatives, Okochi joined U.S.Treasury Secretary Timothy Geithner; CME Group Executive Chairman Terrence Duffy; Intercontinental Exchange (ICE) Senior Vice President, General Counsel and Corporate Secretary Johnathan Short; The Depository Trust & Clearing Organization (DTCC) Managing Director Peter Axilrod; and JPMorgan Chase & Co. Managing Director and Head of Global Commodities Group Blythe Masters.
In his written testimony, Okochi emphasizes that ânon-financial corporations using OTC derivatives to hedge specific business risks were not the cause of the recent financial crisis, and every consideration should be given to this class of users so that they are not penalized for using OTC derivatives properly.â
Although Okochi acknowledges the fact that most companies agree with the need to regulate the OTC derivative markets, he highlights key concerns for end-users facing the pending reform, including hedging issues surrounding standardization of trades and the various costs companies most likely will incur. Of specific concern, Okochi says, is âthat even if end-users are exempted from posting margin, if Swap Dealers will be required to post capital and margin against end-user related transactions, then ultimately the Swap Dealers may in turn require their endâuser clients to post margin to them. In such a scenario, the unintended consequence would be that endâusers would have to post cash collateral to Swap Dealers instead of derivative clearing organizations, which would drive up costs anyway.â
Among his recommendations, Okochi suggests that, aside from event-driven instruments, such as Credit Default Swaps (CDS) and OTC derivatives with notional principal exchanges, âSwaps under 12 months in maturity could be exempt since they typically would not impose real systemic risk and their future potential risk is also lower than longerâdated Swaps.â Specifically, he says, âI hope the Committee will not only include the exemption of foreign exchange swaps and foreign exchange forwards included in other proposals but would also consider exemption for single currency interest rate swaps and commodity swaps less than 12 months.â
As part of its effort over the past seven months to bring about both transparency and the fair reform of the nearly $600 trillion OTC derivatives market, Reval will continue to provide guidance to members of Congress on reform issues specific to how companies use derivatives to hedge exposures to fluctuations in interest rates, currencies, and commodity prices.
Okochiâs testimony can be found on Revalâs micro site, www.savemyswaps.com, which Okochi created in June to provide an interactive destination for corporate end-users to voice their concerns with reform efforts.