Fallout: The Financial Crisis

Derivatives regulation worries dealers

John Dimsdale Jun 4, 2009
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Fallout: The Financial Crisis

Derivatives regulation worries dealers

John Dimsdale Jun 4, 2009
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TEXT OF STORY

Kai Ryssdal: To paraphrase Benjamin Franklin if I might, I think we can safely add new financial regulations to death and taxes on the list of things we know are coming. Both Congress and the White House have promised as much. Especially for the largely unregulated but huge — on the order of trillions of dollars — market for what are known as derivatives. That’s almost anything that’s not a straight stock or a commodity.

Credit default swaps and AIG are a great example of derivatives gone horribly wrong. Today the head regulator for the futures trading industry proposed some new rules. Our Washington bureau chief John Dimsdale reports that that has prompted some worries about regulatory overreach.


JOHN DIMSDALE: Companies use derivatives contracts as insurance against dramatic swings in prices of commodities, say flour or oil. But with no oversight, these contracts became a new form of speculation as investors bet on everything from real-estate prices to interest rates.

At a Senate hearing today, the new chair of the Commodity Futures Trading Commission, Gary Gensler, said it’s time to impose some rules.

GARY GENSLER: Such reforms must comprehensively regulate both the derivative dealers, those institutions that make markets in these products, as well as regulating the markets themselves.

Gensler wants all derivatives trading to go through a clearing house. Essentially, trades would be supervised. And banks and other financial institutions that trade the contracts would have to put up capital to guarantee payments. Financial institutions don’t like that idea. They say that posting collateral would eat away their profits. And, they say, a regulated exchange would eliminate flexibility. Mark Lenczowski is a managing director at JPMorgan Chase.

MARK LENCZOWSKI: We think it would be a mistake to impose that kind of a one size fits all requirement on our economy.

But after today’s hearing, Iowa Senator Tom Harkin, who backs regulation, said he still wants derivatives trading out in the open, so everyone can see their value.

TOM HARKIN: Price discovery is important and that’s why I still come back to this idea of putting these on a regulated exchange.

Senator Harkin expects Congress to move on derivatives regulations in the fall.

In Washington, I’m John Dimsdale for Marketplace.

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