Tuesday, December 15, 2009

Derivatives Push-Back

Original posted on Bloomberg By Alison Vekshin and Michael J. Moore:

Wall Street pushed back with some success against proposals to regulate derivatives, such as one put forward by Senator Tom Harkin, an Iowa Democrat who served as chairman of the Senate Agriculture Committee until September, that would have required all contracts be conducted on regulated exchanges.

Derivatives contracts, including credit-default swaps, are used by companies to protect against swings in commodity prices, interest rates and other operational risks. Trading them on exchanges would carry transaction costs and crimp one of Wall Street’s most lucrative businesses. The top five U.S. commercial banks were on track at the end of the second quarter to earn $35 billion in over-the-counter derivatives trading this year, according to a review of company filings with the Fed and people familiar with the banks’ income sources.

Much of the lobbying was conducted by the Coalition for Derivatives End-Users, a trade group that represents companies such as Apple Inc. and Johnson & Johnson. The group asked banks not to join their negotiations with lawmakers for fear that the unpopularity of the financial industry would harm their case, according to people familiar with the discussions.

New Democrats

Under the House bill, banks will still be able to trade customized derivatives contracts over-the-counter. Because of choices about where trades can be executed, few standardized contracts may be pushed onto exchanges. Airlines, energy companies and other corporate end-users that rely on derivatives would also be exempt from most new requirements.

“The OTC reform has gotten to be basically irrelevant as far as change,” said Chris Whalen, managing director of Institutional Risk Analytics in Torrance, California. “There are some things in there that are irritating to the Street, but compared with what we thought we were going to get over the summer, it’s night and day.”

The New Democrat Coalition, a group of 68 pro-business lawmakers in Congress, has succeeded in making changes in the House bill sought by the industry. One involved the issue of whether the federal government can override states in applying consumer protection laws.

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