Reply #10: Don’t Let Exceptions Kill the Rule

[ProSense]

Don’t Let Exceptions Kill the Rule

By GRETCHEN MORGENSON
Published: October 17, 2009

CONGRESS began the work of reforming our troubled financial system last week, and a bill aimed at regulating derivatives passed the House Financial Services Committee on Thursday.

Derivatives — contracts that theoretically protect buyers from unforeseen financial calamities but more often are used to fuel raw speculation — were, lest we forget, at the heart of the banking crisis.

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The best aspect of the House bill is that it requires many swaps to be traded on exchanges just like stocks, subjecting them for the first time to the light of day. But elsewhere in the bill, known as the Over-the-Counter Derivatives Market Act of 2009, exceptions to this exchange-trading rule undermine its regulatory power.

Derivatives regulation has been on the nation’s financial reform agenda for months. Undoing the Clinton-era law that exempted swaps from oversight is seen as imperative, except perhaps by big banks that deal in the contracts. It’s worth noting that many members of the Clinton economic team, including Lawrence Summers, Timothy Geithner and Gary Gensler, now hold pivotal policy-making positions in the Obama administration.

In August, the White House sent its derivatives proposal to Congress, recommending that all standardized contracts trade on an exchange. But big banks dealing in swaps don’t want exchange trading, where pricing and the identities of participants would be more publicly transparent. Savvier swaps customers would soon pay less on their transactions and bank profits would fall.

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To be sure, the House bill is just the first step in what is likely to be a long road to reforming this huge and opaque market. And more oversight is surely better than none. The House Agriculture Committee, which oversees the Commodity Futures Trading Commission, will take up the matter now.

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