The New York Times--and apparently Capitol Hill--pick-up today where my diary, "Is Wall St. Railroading Main St. On Derivatives Oversight?" left off late last night. Read about it right here: "Regulator to Detail Plan for Derivatives."
Regulator to Detail Plan for Derivatives
New York Times
By STEPHEN LABATON
Published: June 3, 2009 In Print: June 4, 2009
WASHINGTON -- The new chairman of the Commodity Futures Trading Commission will ask Congress on Thursday to impose substantial new costs and restrictions on large banks and other financial institutions that deal in the complex and largely unregulated financial instruments known as derivatives.
Gary G. Gensler, the top regulator for futures trading, will provide significant new details of a plan announced three weeks ago by the Treasury secretary, Timothy F. Geithner. Mr. Gensler will disclose his proposal before the Senate Agriculture Committee, which oversees the commission.
The article tells us Gensler will propose "...two sets of regulations -- one set for the individual dealers of derivatives and a second set for the marketplaces where the instruments are traded."
As I described it last night, earlier this week, Wall Street attempted to preempt this effort by proposing self-policing initiatives over the past 48 hours. Of course, everyone realizes that it was due to this breakdown in self-regulation that the derivatives market collapsed last Fall (in the first place).
Tonight's story comes right out and says that these two sets of rules proposed by Gensler will "...eliminate the loopholes that critics said would have weakened the Treasury secretary's plan..." However, it's also noted that some folks still think the proposal doesn't go far enough to solve the problems that led to the recent market collapse.
We're told that Gensler's proposal will "fundamentally alter the way that derivatives dealers do business." Examples given include: stringent requirements for capital reserves and collateral (i.e.: which would be forefeited by traders under certain circumstances). And, this proposed legislation will add significant new trading costs, thus reducing Wall Street's profitability (some have referred to it as "excessive profitability" to date) on these investment vehicles.
The plan is expected to run into sharp resistance from the industry, which this week proposed its own set of voluntary rules as part of an effort to head off more aggressive legislation. Some lawmakers who applauded Mr. Geithner's plan said they intended to press Mr. Gensler to be more aggressive in policing the marketplace even before Congress completes work on the derivatives legislation.
"Gensler has to show that the C.F.T.C. will have teeth and we can implement some things right now," said Senator Maria Cantwell, Democrat of Washington. She said she had asked Mr. Gensler in recent days to revoke exemptions given to some oil futures traders through what are called no-action letters that she said could permit the manipulation of prices to consumers.
Many had voiced concern over the past few days about Treasury Secretary Geithner's original outline for these regulatory enhancements, primarily because he was proposing less regulation of some of the more complex derivative products, thus creating virtual loopholes in the legislation. But, we're told that Gensler, in his testimony later today, will "...describe mechanisms to both supervise the marketplace of customized derivatives and impose standards that presume most derivatives are standard and subject to more rigorous oversight."
This 'get-tough' proposal is being met with significant enthusiasm on the Hill, at least from some quarters. We'll see what happens; but all in all, this is excellent news. I'd say I'm cautiously optimistic about it. Of course, it's all about the final draft of the legislation; then pushing for it to actually pass without too much convolution. Let's keep our fingers crossed!