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Should current derivatives face reform?

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Tess Vigeland: It’s been more than a year-and-a-half since the U.S. stock market and economy went into a tailspin. And there’s been a lot of talk of reform to go along with recriminations.

Today the Senate is expected to vote on whether a major overhaul of the financial regulatory system will go forward. And as they search for some sliver of bipartisan agreement, a divisive new issue has come to the fore: It’s all about grandfathering in the current contracts for the complex financial instruments known as “derivatives.” Should they be subject to any new rules?

Marketplace’s John Dimsdale has more.


JOHN DIMSDALE: The reform bill requires derivative traders to set aside money as collateral to cover potential losses when their bets go bad. Current derivative holders want an amendment to exempt existing contracts from those collateral requirements.

Brookings fellow Douglas Elliott says exemptions are a bad idea because even existing contracts carry substantial risks.

DOUGLAS ELLIOTT: If we increase the requirements as this bill would do, even if the party on the other side can’t fulfill their obligations, at least some of that loss will be taken care of by the collateral.

But requiring derivative holders to set aside billions of dollars would hurt the economy, says Ryan McKee at the U.S. Chamber of Commerce.

RYAN McKEE: Any new requirements would be a significant drain on the working capital they would otherwise be using to create jobs, to grow their businesses, to invest in research and development.

Despite some powerful lobbying, including from Berkshire Hathaway CEO Warren Buffett, the bill heading to the Senate floor would not exempt derivative holders from extra collateral requirements.

Christopher Whalen at Institutional Risk Analytics says derivative traders have been able to place bets without backing them up for too long.

CHRISTOPHER WHALEN: And it’s especially obnoxious to see Warren Buffett leading this effort. He’s the man who told us that these derivatives were weapons of mass destruction.

Berkshire Hathaway owns more than $60 billion in derivatives contracts.

In Washington, I’m John Dimsdale for Marketplace.

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