Preuss: Itís important to have an active, continuous dialogue with users and members. There is no such thing as static solution that represents the best; nothing that cannot be improved. Itís all about risk: risk management, reduction of systemic risk, making sure that the constant evolution of innovation that comes from the OTC or bilaterally traded markets evolves towards commoditization. It must be close to the minds and hearts, and find a balance that they need to strike together with the market. Itís critical to extend the right level of participation in the structuring, design, handling of risk. Not compromising the asset for the community that comes from uncompromising neutrality.

Jones:  Weíre looking at three separate things: risk, audit, and compliance. Itís important that the functions are independent of core product, and not be too much above the fray. CEOs must be there, they cannot delegate.

Donohue: There are three driving factors: risk management aspects of clearinghouse, competitive dynamics, and the rules themselves.

Prager:  From the buy-side, how do you see meaningful participation by the buy-side in governance forums? Risk committees?

Sprecher: Clearing is a mutualization of risk. Anytime you introduce a new member, all the other members what to be sure there are high standards, but at the same time, you donít want to be anti-competitive by not allowing someone in. We must deal with risk and not tangential issues. As a steward of an organization, make sure decision making process is robust and honest.

Preuss: The buy-side on both sides of the Atlantic is currently exploring the upside of direct interaction by participating in dialogues such as this, though itís further developed in U.S. than in Europe. The best thing that can happen to all of us is that we compose the entirety of industry in the highest quality dialogue, interests, function, and expected desires for outcome being articulated. We have to strike balance of sometimes not reconcilable differences, but he is optimistic that dialogue has evolved. He agrees with Sprecher that a newer party (regulators) is in the room, and that is something that is for the lasting good of the entire marketplace. One can never stand still in innovation. Real-time position calculation and risk management is not the standard yet, but will have to become so. Additionally, corresponding collateral with positions is one of the most strategically important areas of work that theyíre undertaking.

Prager: Regarding M&A: competition is good. In this space, there is the paradox of mad dash to eat each other op, yet offer competition. How is it good for clients?

Jones: This industry, this structure is based on scale. Markets are global, and we must have global competitors. They feel they have to get larger, either through M&A or organically. Any merger has to consider three constituents: shareholders, clients, and staff.  For any acquisition, one needs to look at synergies and value for end users. 

Preuss:  The concept of developing scale has to be looked at in the context of global scale. Asian business is not as far along as they would like to have it developed ñ that is the next phase of the globalization of this business. One must look to scaling models, and from there, then the two ways of contributing to scaling ñ organic and inorganic growth. Growth has to be an accomplished mix of both. Liquidity begets liquidity. This is true across all liquidity pools, trading, and clearing.

Prager: With cross-border M&A going on, there is a nationalistic spirit happening as financial systems are reformed. Regulators are determined to be more national. How will these cross-border flows come to pass when you have funds and customers in different geographies?

Sprecher: Itís a challenge. They faced it a few years ago, when creating a credit default swap clearing house with The OCC, but European regulators wouldnít allow it, so currently there is a bifurcated market with two clearinghouses with members, but with local regulators regulating members. This has led to complicated markets in credit default swaps.

Jones: A better short term goal would be linking like products in the shorter term, and moving that forward in each jurisdiction, particularly in event of a default.

Prager: How can cross margining benefits be brought to clients?

Preuss: Looking at the overall chain of customer, clearing member, and exchange, we should take a closer look at who the parties are that are benefitting, and to what degree from the improvements that they just discussed. The right answer is that there has to be a fair sharing of resulting benefits. The entire community needs to benefit from improvements. Otherwise itís a one-sided approach. What does increased scale bring to the overall market?

Donohue: We need to look for areas where we can promote the market efficiencies for these participants. Margin requirements for swaps should be a function of the risk involved.

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