Hey kids! Were you holding out hope that someone might do something to robustly regulate the derivatives market that wrought such wrack and ruin to the global economy? Ha, ha, that's adorable! Tina Seeley and Dawn Kopecki report for Bloomberg today that "Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules." Great!
Here's where the specific exemption lies:
A plan offered by the Obama administration would subject all swaps dealers and "major market participants" to new regulations for capital, business conduct, record-keeping and reporting. [Representative Barney] Frank's version would exempt corporations from that definition if they use derivatives for "risk management" purposes.
While Frank's proposal is a "step in the right direction," its "ambiguous" definition of risk management may leave a large number of corporations unregulated, Henry T.C. Hu, director of the SEC's new division of risk, strategy and financial innovation, told the committee.
Funny thing: the way the concept of credit derivatives was explained to me sort of made it sound like the daisy chain of "risk management" didn't actually diffuse the systemic risk in the derivatives market. (AIG was just one of the now bailed-out companies that used derivatives to "manage risk.") Well, Commodity Futures Trade Commission chair Gary Gensler thinks Frank should "eliminate the 'risk management' exclusion altogether." Frank says that he will "sharpen" the bill, saying, "I don't think what he says is accurate, but my view is why take the chance? So we agree with him as to the concepts and we'll make the language very clear." And Barry Ritholtz, over at The Big Picture, basically says: NO, NO, NO, YOU'RE DOING IT WRONG.
Any plan that seeks to reverse the unregulated wild west that derivatives have existed in since 2000 must have a simple beginning: Repeal the Commodity Futures Modernization Act.
This ruinous and corrupt legislation, pushed through by the Bonnie & Clyde of derivatives, Enron Board member Wendy Gramm, and her astonishingly clueless ideologue husband, former Texas Senator (and current UBS member) Phil Gramm, lay at the heart of the current derivatives debacle.
Ritholtz offers further prescriptives: "In addition to the full repeal of CFMA, derivatives should be 1) Traded on exchanges ONLY; 2) counter parties must be adequately capitalized and transparently disclosed; 3) appropriately reserved for; 4) Where derivatives are acting as insurance, state insurance commissions should have oversight and audit capability."
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