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Comment for General CFTC CFTC and SEC Staff Public Roundtable on International Issues relating to Dodd-Frank Title VII

  • From: Scott A Shuttleworth
    Curtin University

    Comment No: 48170
    Date: 9/16/2011

    Comment Text:

    My suggestions would be in line with the idea that there should be a set amount of risk a public financial institution can take in the financial markets.

    Our problem with the GFC was that so many banks had taken on so much risk, that in the event of things failing, they would go bust, freezing the credit markets and causing a crash.

    Quite simply, these firms shouldn't be allowed to take such huge risks. Is it really worth risking the firm (or the world economy) going under just to have another year of record profits?

    My focus would not be on individuals or small firms, if they wish to be irresponsible with risk that is their own concern. My focus would be on firms that are 'too big to fail', especially those who are public listed.

    I would separate firms such as these into two groups. The first being very large public listed firms whose collapse would cause great damage to the investment made by their shareholders.

    The second group being any kind of firm (public or private) whose demise would cause significant damage to the local or global economy.

    In regards to the first group, shareholders should not be kept in the dark in respect to management’s excessive risk taking. Thus there is needed for greater transparency between the operations of the derivatives desks, firms and their shareholders.

    The shareholders should have the right to decide whether they approve of extra risk taking via a vote at the general meeting. Thus any shareholder who does not wish to take on the extra risk may invest their capital elsewhere.

    In regards to the second group I would advise a limit on how much risk these firms can take at one time with derivatives. Too put it simply, if their bets go bad (even very very bad), the firm should still be on solvent ground have no residual effects on their ability to serve their clients.

    The firms if wanting to engage in derivatives must provide details of their exposures to the regulator to ensure they are maintaining conservative risk ratios.

    I would also recommend greater collateral requirements when dealing in derivatives by firm to ensure unexpected events have less of an effect on their solvency. (In other words, reducing 'fat tailed' risk.)

    I strongly support that idea of firms being able to engage freely in the financial markets, whether for hedging or speculative purposes. What I do not support however is dangerous levels of risk taking (case examples, Lehman Brother, AIG or LTCM).

    There is a great need for greater regulation and transparency in both the OTC and Exchange based markets to ensure either two of the above categories are not taking excessive risks. The purpose is simple and one we can all agree on, to protect the world economy and the taxpayer's hard earned money.

    I hope my recommendations above may help and if I can be of any assistance or if I am needed to clarify anything, please do not hesitate to contact me.


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