Transparency in Financial Markets

The National Conference of Insurance Legislators (NCOIL) describes itself as “the voice of state legislators on Capitol Hill” and “the only organization of its kind dedicated exclusively to promoting sound insurance public policy,” with the purpose “to help legislators make informed decisions on insurance issues that affect their constituents…”

On January 24, 2009, Connie and Michael Erlanger presented the following testimony to NCOIL on the subject of Credit Default Swaps (CDS):

TRANSPARENCY IN FINANCIAL MARKETS

Ladies and Gentlemen of the committee, thank you for giving us this opportunity to speak before you today.

I am Connie Erlanger, and with me is my husband Michael Erlanger. We are the founders and managing principals of a privately held company, Marketcore. Our company is dedicated to creating solutions that enhance financial markets. We believe that our proposed solution is responsive to all of the issues raised today regarding the crisis in the Credit Default Swap (CDS) market.

At the outset I want to make the observation that throughout the testimonies and discussion today there has been extensive debate about how to identify CDS, and whether or not to require parties to a CDS transaction to post collateral, versus hold capital in reserve; and which accounting standards should or should not be applied, etc. But no one has raised the question of information. We believe that inadequate information is at the heart of the CDS crisis, as well as the larger economic crisis in general. We are here to propose a solution to the CDS market crisis, that provides a structure for the market going forward, and that is grounded in unfettered access to information.

Risks are defined by the underwriting standards, terms and conditions that are contained in every financial contract. Those underwriting standards and statistics define the specific elements of any risk transfer. Understanding them is essential to understanding the risks that each counterparty to a contract is willing to assume – whether it is in the form of loans, lines of credit, insurance, or CDS. Transparency in the financial markets is key to restoring confidence in the meaning of contracts, to empowering regulators to do their jobs correctly and completely, and it is key to restoring confidence in the function and purpose of the markets. Transparency is simply defined as access to all necessary information.

Marketcore has a patented and patent pending design for data processing systems that create transparent markets. The data processing system can support a single, or multiple linked, transaction platforms or clearinghouse facilities, and collects all the data points – those underwriting standards and statistics – of each transaction. That data is displayed electronically, in real time, and is available to all market participants, including regulators.

Each transaction as it enters the system is assigned what we call a Transaction Credit™. The Transaction Credit™ has two features: it is of real economic and strategic benefit to the principals of a transaction, and, it functions as a unique tracking mechanism that travels with all components of a transaction, through to the maturity or final disposition of the underlying financial instrument. The Marketcore system generates a real-time data stream, or electronic “ticker tape”, on the market in which it is used.

One of our trademarks is “Information is to financial markets as oxygen is to life™”. The flow of information that our system provides is critical to restoring the life of our financial markets and our economy. This flow of information and the tracking mechanism provided by our system is critical to creating full transparency in the market. It enables price discovery on a real-time basis. It resolves the matter of determining counterparty risk. It empowers regulators to do their jobs without encumbrance. Some experts who have evaluated our work say that our system provides a means by which our nation may actually grow its way out of this economic crisis.

In November 2008 the Congressional Research Service (the public policy research arm of the Library of Congress) released a report to Congress in which Marketcore’s work is cited as offering a solution to the opacity and illiquidity in capital markets. Copies of an excerpt from that report have been provided to each of you. The title of the report explains its focus: “Financing Recovery from Large Scale Natural Disaster.” A portion of the report addresses the need for fully functioning capital markets to facilitate properly functioning insurance markets. Marketcore’s solution is cited in the context of restoring liquidity, operating efficiency, and creating transparency in capital markets. We are deeply honored by this recognition of our work.

To the extent that we all agree that CDS are a form of financial contract, we believe that the Marketcore solution, our data processing system, can be used to create transparency and restore confidence in the CDS market. We are here to assist you in identifying the causes of the crisis at hand, and to offer our solution to that crisis. Our solution offers a way to go forward from here. If the true intention is to fully identify and understand the risks of CDS, you must know the inherent risk of each and every underlying contract. That requires the full and clear disclosure of the underwriting standards and statistics, provision of easy access to that information in a timely manner, and the ability to track all such information.

There is general agreement that transparency is required now, and that is precisely what our system creates. It does so in a way that is compatible with exchanges, clearing houses, and virtually all approaches because underwriting standards and statistics are the building blocks of all financial products. It is our hope that you will read the CRS report that we have provided to you, and that we will have the opportunity to work with you to implement the Marketcore solution as a critical step toward resolving the crisis in the CDS market.

Thank you for your time.

Constance Erlanger and Michael Erlanger
Managing Principals
Marketcore, Inc.

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