Bill Proposed to Regulate Derivatives Trade
Wednesday, August 12, 2009
The Obama administration formally proposed legislation on Tuesday to regulate exotic financial instruments known as derivatives, the final piece of the broad rework of financial regulations to be delivered to Congress.
Now, the hard part.
When lawmakers return from recess, they will not only grapple with health-care reform but also take up a series of legislative changes aimed at creating a single agency to oversee credit card and mortgage lending, to give the Federal Reserve new powers, and to tighten regulations over a host of financial firms and practices.
Although the administration has made its formal proposals on these issues, Congress will probably seek modifications. Key lawmakers said they hope to have legislation the president can sign by year's end.
Opposition has been building -- from Republicans, conservative Democrats, the financial industry and even regulators -- to the idea of a consumer financial products agency.
Lawmakers from both sides of the aisle doubt the wisdom of giving the Fed new powers. Some question why the administration hasn't proposed more ambitious efforts to consolidate oversight of the banking industry.
With agreement by the House Agriculture and Financial Services committees over regulation of derivatives, the legislation proposed on Tuesday may not face as much debate as other issues. The administration proposes that most derivatives be traded on exchanges, like stocks and bonds, and that dealers -- particularly banks -- buying and selling derivatives meet robust requirements.
Currently, the market for derivatives is unregulated. The Securities and Exchange Commission, the Commodity Futures Trading Commission and the banking regulatory agencies would share responsibility for oversight of the derivatives market.
One open question is whether lawmakers will push for derivatives legislation to go beyond what the administration has requested.
Many derivatives are used to hedge against various investment risks. Increasingly, however, traders have bought and sold derivatives simply to speculate on market moves -- not as a hedge. This speculative trading has fueled concerns about wild gyrations in a variety of markets -- from commodities to corporate bonds -- and also about fraud. Some analysts think lawmakers may seek to ban this type of derivatives trading.
The administration, which thinks that financial speculation in derivatives can serve as a lubricant to the overall derivatives market, has not endorsed such a ban.