Proposed rules to increase transparency in the $708 trillionprivate derivatives market may combine for an amplified effect thatboosts costs for users, according to industry executives.

Trading in interest-rate, credit-default and other swaps maydecrease if several changes are taken together, James Hill, amanaging director at Morgan Stanley, said today at the annualconference of the International Swaps and Derivatives Associationin Chicago.

“I'm very concerned there's a multiplier effect to this,” Hillsaid during a panel discussion. “That's something we need to lookout for.” He listed increased costs associated with margin forswaps trades, for processing transactions with a clearinghouse andincreased capital requirements banks will have to adopt.

Banks, hedge funds and asset managers active in theover-the-counter derivatives market are adapting to changesmandated by the Dodd Frank Act passed by Congress in 2010,including a requirement to process most swaps with a clearinghouseto cut counterparty risk. While embracing measures to adoptclearing, the industry group has opposed requirements that anycleared swap be traded on exchanges or similar electronicsystems.

There needs to be time for market users to adapt to the changescoming under Dodd Frank and to absorb the costs, said William DeLeon, global head of portfolio risk management at Newport Beach,California-based Pacific Investment Management Co.

'Knock-on Effects'

“The cold-turkey effect can be quite large,” said De Leon, whois also an ISDA board member. “As you add them up, the unknowns arequite large and the potential knock-on effects are larger than we'dhoped.”

Making prices known to the public helps improve market activity,Gary Gensler, chairman of the Commodity Futures Trading Commission,said today in remarks to the conference.

“Economists for decades have shown that transparency lowerstrading costs, lowers bid-ask spreads, increases liquidity,”Gensler said.

Such a view is at odds with trading in swaps markets, Hillsaid.

“That's simply not correct in these markets,” he said. “Thereare times increased transparency can reduce liquidity.”

De Leon said the effects of publicly reporting swaps tradeprices and moving trading onto electronic systems could harm largeinvestors.

“For the occasional user of derivatives who's not watching themarket every day who trades small size, this transparency will be abenefit to them because they'll get more information,” he said.

For larger investors who trade in bigger size on behalf ofclients, increased transparency may hurt the firm as “the bid- askwill be higher and it will ultimately hurt our investors,” De Leonsaid. “From that standpoint I think the market needs to be patient”and not rush implementation of the rules, he said.

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