Derivatives may slip away, like mussels

19 Nov

Despite all the watering down of the financial reform spirit, US regulators is coming up with some stuff that actually bites, although less hard that one have expected in 2008 and given the cost that we all pay for the colossal failures of the financial sector. Mike Masters from Better Markets puts the cost at 13 trillion for the global economy.

So what is being tabled by CFTC (Commodity Futures Trading Commission) in the States is a battery of rules in effect under the Dodd-Frank financial reform law meant to throw a net on derivatives trading, one of the engines of the Lehman crisis. Two reforms stand out and they have already attracted heavy lobbying, according to NYT:

1. “One would require that most derivatives be traded on open electronic platforms, with prices visible to all participants before deals were done. That would curtail the practice of trading derivatives as private bilateral contracts, which would help to prevent destabilizing risks from building up without regulatory oversight.

Banks object to this rule because transparent trading will invariably lead to lower prices for derivatives and lower profits for banks. They want broad exceptions to the rules, especially for large trades, which they say will disrupt markets if done openly. But that problem could be managed with a narrow exemption. To protect the public, regulators must ensure that the new rule will require the vast majority of trades — more than 90 percent — to be conducted openly.

2. ‘New derivatives rules apply to trades made through the foreign branches, affiliates or subsidiaries of American banks. That is crucial, because in a global economy, risk knows no borders. Banks, however, want “substituted compliance,” in which foreign affiliates are regulated by the foreign country as long as that country has similar rules.

The trouble is, derivatives rules are weaker or nonexistent elsewhere, making the call for substituted compliance either a tactic to delay enforcement until the rest of the world updates its regulations or, worse, an attempt to avoid tough regulation altogether.”

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