Another Warning from a Different CFTC Chair

This time it comes from current chair (and former Asst. Treasury Sect. under Robert Rubin) Gary Gensler. He is warning congress about exempting hedge funds from the current proposal on derivatives. As amended the current proposals have been weakened already but here is his warning:

Hedge funds and financial firms shouldn’t be allowed to sidestep potential new laws governing the $592 trillion over-the-counter derivatives market, Gary Gensler, chairman of the Commodity Futures Trading Commission said today in Chicago.

Any exemptions for so-called end-users should be “very narrowly defined” to include only non-financial institutions, Gensler said. End-users such as utilities, energy producers and agricultural companies have pushed for an exemption to new laws that would require standardized over-the-counter trades to go through exchanges or clearing houses.

Remember, Long Term Capital Management (LTCM) - what short-term memories we have.

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Huffpost: Democrats are Gutting another Bill

This time it is the Over the Counter Derivatives Markets Act of 2009.

Now, the House Financial Services has already passed a watered down version of this Act last week. The House Agriculture Committee's took its turn yesterday and passed an even weaker version. Overall, the problem has been there are exemptions everywhere. This potential exemption will kill this bill:

The Agriculture Committee's bill, shepherded by Chairman Collin Peterson (D-Minn.), does increase oversight of these previously mysterious and exotic financial instruments, experts say. Many derivatives trades would now have to go through clearinghouses or an exchange. But there are exemptions. In an effort to protect companies like airlines and manufacturers that use derivatives to hedge against things like price fluctuations and currency exchange rates, these so-called end-users would not be required to make public the terms of their contracts. Rather, they would continue to operate in the dark.

But Peterson on Wednesday amended the bill to extend the exemption to big banks and financial institutions, as long as their contracts were with these end-users.

So, if a financial conglomerate is on the other side of a transaction, it is exempt from any disclosure or other requirements. What is the point of the Bill?

Financial conglomerates dominate the OTC market they have their finger prints on probably almost every derivatives contract in OTC.

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Rational people would look at LTCM and AIG

and say maybe we need to do something about OTC derivatives particularly the non-standardized ones. Nay.

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Derivatives

Submitted by on

One approach would be to prohibit outright gambling by banks, and link capital requirements to dertivatives exposure. Also, have Fed and Treasury articulate an "at your own risk" policy for losses from derivatives. If you are going to insure others, you had damned well better be able to cover claims without recourse to the taxpayers. We need a firewall in place.
Frank T.

Frank T.

Agreed. A firewall or just out right ban

"off-balance sheet" investment schemes for regulated entities.

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