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Fallout: The Financial Crisis

Panel passes new rules on derivatives

John Dimsdale Oct 15, 2009
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Fallout: The Financial Crisis

Panel passes new rules on derivatives

John Dimsdale Oct 15, 2009
HTML EMBED:
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TEXT OF STORY

Kai Ryssdal: In the House of Representatives today, there was a small first step toward new regulations for the financial industry. The House Financial Services Committee passed new rules for derivatives, essentially complex insurance policies against future fluctuations in prices. In their unregulated heyday, derivatives were used to bet on the direction of everything from real-estate to interest rates. They were responsible, in part, for what happened at Lehman Brothers and AIG. Reformers figure if derivative trading was more public that’d take care of a lot of the abuses. John Dimsdale reports from Washington.


JOHN DIMSDALE: The bill would require the trading of derivatives on an open exchange, and that’s a form of regulation, says University of Maryland law professor Michael Greenberger.

MICHAEL GREENBERGER: If they’re traded on exchange, they’re public. They’re transparent. The prices are well set and well established.

Lots of industries use derivatives to insure against changes in commodity prices or interest rates or foreign currency values. Energy companies, retailers, phone companies, car dealers all successfully lobbied lawmakers for broad exemptions from the exchange requirement.

GREENBERGER: Unfortunately, I think too many devilish hands worked on this, and the exemptions to the general regulatory requirement almost eat the exchange trading requirement away.

But Barbara Matthews, a regulatory consultant, says derivative traders oppose regulated exchanges because they reduce flexibility and increase the cost of doing business.

BARBARA MATTHEWS: In order to trade on an exchange, the contracts themselves need to be standardized. Trying to fit everything into that one box, standard contract terms, standard expiration dates, creates big problems for corporate America.

Not exempted from the exchange requirement are banks and Wall Street investment firms. Lawmakers think they traded derivatives for more speculative reasons. But here’s still plenty of opportunity for bank lobbyists to add even more exemptions since several more congressional committees will review the bill.

In Washington, I’m John Dimsdale for Marketplace.

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