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Senate passes stricter derivatives rules

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TEXT OF INTERVIEW

Steve Chiotakis: A Senate committee late yesterday passed a bill that calls for tougher rules on derivatives trading. It was approved by the Agriculture Committee 13-8. That panel deals with derivatives because it oversees commodities. Republican Senator Chuck Grassley of Iowa joined Democrats to vote in support. Gregory Warner, Marketplace's Gregory Warner, is with us live to talk about it this morning. Good morning.

Gregory Warner: Good morning.

Chiotakis: What exactly is this bill?

Warner: Well one of the big criticisms of derivatives trading is that it takes place in the shadows. This bill would move all derivatives to an open exchange. Banks would have to instantly report prices of trades like you see with a ticker tape on stocks. The situation now is the prices might be revealed to the public only at the end of the day. Second, the bill would bar commercial banks from derivatives trading. That's banks like JPMorgan Chase and Bank of America that make billions on this market. And finally, the bill says that investors would have to put up collateral to buy derivatives to show that they can make good on the bet.

Chiotakis: Why, Gregory, are derivatives and their oversight so important to folks?

Warner: Now this is really a question of how much instability, how much risk is good for the economy. And one reason the derivative market is blamed for the financial meltdown is that it's so highly borrowed. Investors are making bets that they don't have the cash or securities to back up. So if we think of a derivative as a bet on a change that'll happen in the future -- that change could be oil prices going up or the weather staying sunny -- what all derivative trades allow investors to do is make a lot of money on very tiny fluctuations. And when those fluctuations are bigger than expected or wilder, it can topple a company. That's what unseeded AIG, and many say it's what made the market so quick to destabilize during the crisis.

Chiotakis: Where are we now with financial reform, Gregory? How does this fit into all of that?

Warner: Well this bill gets merged with the financial reform bill that the Senate takes up next week, and today President Obama will speak in New York trying to build support for that bill.

Chiotakis: Marketplace's Gregory Warner, reporting live this morning. Gregory, thanks.

Warner: Thanks Steve.

About the author

Gregory Warner is a senior reporter covering the economics and business of healthcare for the entire Marketplace portfolio.

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