Oil Spill Culprit BP Fighting To Open Loopholes In Derivatives Reform


Today, the Senate will resume consideration of Sen. Chris Dodd’s (D-CT) financial regulatory reform bill, with voting on amendments expected to begin tomorrow. In the meantime, the financial services industry and its allies are still fighting reform, particularly in the area of derivatives, the complex financial instruments that played a critical role in the economic crisis.

In the first quarter of this year, the banks spent $6.1 million lobbying. But as I’ve noted before, the banks have enlisted big corporations to act as their proxies in the derivatives fight, particularly through a group known as the Coalition of Derivatives End Users. The group’s goal is to blow holes in derivatives reform legislation, crafting huge loopholes in the attempt to move derivatives trading onto public exchanges (modeled after the stock exchange) and through clearinghouses (which act as middlemen, ensuring both parties have sufficient collateral backing their trade).

As Mother Jones’ Andy Kroll pointed out, oil giant British Petroleum — whose rig in the Gulf of Mexico exploded last month, causing an ongoing oil spill — is a member of the Coalition, and despite its other obviously pressing matters, the company “has still found time to fight tougher financial reforms on Capitol Hill”:

The corporation is a member of the Coalition for Derivatives End-Users, a collection of companies actively pushing for a loophole in new regulations governing derivatives…[W]hat’s got BP upset is a proposal to force derivatives to go through a clearinghouse, a central body that would act as a middleman on each trade, collect data, and help protect failed derivatives deals from leading to massive losses that harm the wider economy…BP doesn’t want to front up cash or collateral when it trades in derivatives.

Lawmakers are trying to draw a line between “good” derivatives, used by companies to hedge against risk, and “bad” derivatives, used by financial companies to speculate. But in trying to make these fine distinctions, Congress could very well open loopholes for financial companies to exploit. As Commodity Futures Trading Commission Chairman Gary Gensler has argued, even well-intentioned attempts could backfire, and “bring along exemptions for transactions between dealers and their financial customers.”

Plus, Gensler has argued that full regulation of derivatives, without exemptions for end-users, will bring down costs for everyone, including the very companies trying to exempt themselves:

Now I recognize that many of you disagree with me on this issue and favor exemptions from clearing for businesses hedging their risk. You have concerns that the margin – or collateral – required to clear derivatives could be costly. Derivatives dealers, however, already charge counterparties for credit extensions when they do not clear their transactions. How can you know that these costs charged by the dealers — embedded and opaque — are less than the margin associated with clearinghouses? At least margin requirements imposed by clearinghouses are transparent to all market participants and subject to review by the appropriate regulator.

So BP should really focus on cleaning up the mess it made in the Gulf, as strong derivatives reform, without loopholes and exemptions, is in the interest of it and all the other companies that employ derivatives to hedge against risk.