Today, the House Financial Services Committee began marking up regulatory reform legislation, and the first topic of debate was regulation of derivatives, the trading instruments made infamous by, among others, American International Group (AIG) and Lehman Brothers.
As proposed by Committee Chairman Barney Frank (D-MA), the legislation would require that derivatives dealers and companies heavily involved in speculative derivatives trading to list their activity on electronic exchanges, to provide some transparency to the opaque derivatives market. The legislation would also require companies to have more capital on-hand to protect against derivatives losses.
As Frank said, the lesson of recent years has “been that the systemic risk of not having this or a lot of this on exchanges is a negative.” Frank’s approach also matches up with that taken by the House Agricultural Committee, which shares jurisdiction over derivatives with Financial Services.
However, during the markup Republicans made it abundantly clear that they oppose the legislation, claiming that it will be a “job killer,” which will ultimately cause a “decrease in the American dream.” Watch a compilation:
Back when the Republicans first released their vision from regulatory reform, I wondered how seriously they would take regulation of derivatives. And here we have the answer: not very.
The concern that Republicans ostensibly have is that companies who legitimately use derivatives (so-called end-users) to hedge risks would find their access to derivatives restricted by a transparent market. Not only is that a silly argument — as transparency should help the legitimate users of derivatives to have better price information — but the legislation exempts companies “that use derivatives for commercial reasons to protect against risk” from participating in the exchanges. Companies would only lose that exemption “if regulators see a pattern of activity that places other participants in the transactions at risk.”
So by trying to scale back regulation, the GOP (wittingly or not) is doing the work of the Wall Street banks that use derivatives as a money-making end in themselves, not as a means to protect themselves. The committee plans to vote on the derivatives overhaul tomorrow.