problems with new Derivatives regulation;

[amborin]

"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.

Credit default swaps, Wall Street-style insurance contracts that let speculators bet against a company or debt issue, propelled the American International Group off the cliff. Those swaps also linked millions of trading partners, creating a web in which one default threatened to produce a chain of corporate and economic failures worldwide.

And derivatives aren’t going away.

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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.

snip

But Michael Greenberger, a University of Maryland law professor and an expert in derivatives, criticized the House bill. “While I know there was a good-faith effort to improve the regulation, the plain language of the legislation can only be read as a Christmas tree of decorative gifts to the banking industry,” he said. “And this is being done when people acknowledge the unregulated O.T.C. derivatives market was a principal reason for the meltdown.”

A SIGNIFICANT exception in the bill says that if a transaction involves a company that uses a swap to offset its commercial risks — the bill defines this entity as an end user — its trade does not have to be put on an exchange. This was intended to address complaints from swaps customers — like airlines or oil companies that hedge their commercial risks — that their costs would rise unnecessarily under the bill.

The problem is the bill’s lack of specificity about what an end user is. Indeed, what is to stop a hedge fund or private equity firm from setting up companies to meet the “end user” definition so their trades could escape scrutiny? "


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<http://www.nytimes.com/2009/10/18/business/economy/18gret.html?sq=derivatives&st=cse&adxnnl=1&scp=3&adxnnlx=1256099237-dMHa/T/EE/fLsakgATrsgA>

[slipslidingaway]

1. knr nt