Moves to increase transparency in the OTC market

It’s clear that the juggernaut of transparency will be hard, if not impossible to resist. And this is generally a good thing for most derivatives users, even in sophisticated markets like the US. For far too long, OTC derivatives have hidden risk and complexity from users and regulators under the guise of “customization”, providing much value to product innovators but little real value to end users. Eventually, the essentially one-sided nature of much of this technology will be revealed. However, the real risk is that the pendulum will swing too far in the opposite direction, preventing even sophisticated end users laying off their risks with bilateral contracts. Part of the limitations of such a one-sided response is the assumption that transparent markets are a cure-all. They are not. Transparency is about having a information baseline against which all transactors in the market can make their decisions. However derivatives information does not necessarily equate to knowledge or expertise in derivatives product use. All the information in the world does not create an adequate valuation or hedging model, and even less does it create an understanding of the limitations of the valuation models used.
So Regulation should increase transparency of transactions, but it should also target the expertise of potential counterparties. Some institutions (much like non qualified investors) should not be transacting with counterparties if the expertise imbalance is simply too great. And frankly given the huge investments financial services have made in financial engineering human capital, this may often be the case.