New rules would rein in derivatives

Jeremy Hobson Jul 31, 2009
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New rules would rein in derivatives

Jeremy Hobson Jul 31, 2009
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Steve Chiotakis: Remember credit-default swaps? Those insurance contracts on securities that helped bring down insurance giant AIG? Well since the financial crisis, nothing has been done to regulate the unregulated instruments called derivatives, and now Democrats are working on a bill that’ll set rules for these swaps. From New York, here’s Marketplace’s Jeremy Hobson.


Jeremy Hobson: The bill would force most derivatives onto exchanges, where they could be monitored by the government. It could also ban investors from trading credit-default swaps when they don’t own the underlying debt.

Why do we need these rules? Just ask Tamar Frankel, securities law professor at Boston University:

Tamar Frankel: I can promise to pay you $100, but in my pocket, I have two cents. If you accept it and you know that I have two cents and you still want to do it, that’s fine. But if somebody trades in it, then I have a problem, because it’s hard to find out whether I have two cents — and besides, I’ve gone away.

Frankel says forcing traders to keep more money in their pockets would make the whole system safer. But Bob Pickel of the International Swaps and Derivatives Association doesn’t agree.

Bob Pickel: I think we would be concerned about, you know, widening that differential to such an extent where companies are not able to adequately manage the risks that they have in their business.

All this sets up a debate Congress will have when it returns to Washington in September.

In New York, I’m Jeremy Hobson for Marketplace.

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