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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.

"Regulator to Detail Plan for Derivatives" (cont.)


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!

Originally posted to http://www.dailykos.com/user/bobswern on Thu Jun 04, 2009 at 02:35 AM PDT.

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Comment Preferences

  •  Tips: Could It be? Legislation w/teeth in it? (36+ / 0-)
    Or, is this just wishful thinking?

    "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

    by bobswern on Thu Jun 04, 2009 at 02:43:34 AM PDT

    •  Wow a great and positive diary... (5+ / 0-)

      Tipped and Rec'd

      Obama - Real Leadership for a Real Change

      by dvogel001 on Thu Jun 04, 2009 at 04:15:50 AM PDT

      [ Parent ]

      •  Yes .... (4+ / 0-)

        Great diary.

        Please get this topic on the Rec List. Folks -- this is as important as Health Care reform. We need to follow this closely and make sure that Congress does the right thing on it.

        It's a good time to close the barn door now that the horses are back in and raring to go ...

        "Self-regulation is to regulation as self-importance is to importance." Willem Buiter

        by Bronxist on Thu Jun 04, 2009 at 05:18:48 AM PDT

        [ Parent ]

    •  Could be great news.... (2+ / 0-)
      Recommended by:
      Cassandra77, Bronxist

      At least somebody's thinking in the right way about derivatives regulation.  Judging from what I've heard from Bernanke and Geithner, I've been assuming that real financial reform would probably have to come from Barney Frank and the House.  But with Gensler bringing out this proposal and Sheila Bair hopefully working on the banks side, maybe the administration will eventually come out with some meaningful fundamental financial reform.  

      I won't hold my breath on the broader questions, however.  Derivatives regulation is the most obvious and necessary target, and for the administration to miss that one would be truly demoralizing.

      Godwin is dead. Glenn Beck killed him.

      by Dallasdoc on Thu Jun 04, 2009 at 05:47:39 AM PDT

      [ Parent ]

      •  Yeah, but... (2+ / 0-)
        Recommended by:
        samddobermann, vets74

        is the Senate Agriculture Committee the right place to craft Wall Street re-regulation bills?

        I understand the hand that was dealt, this is being treated a Futures Exchange kind of issue, and historically you trade tangible things like September corn deliveries on a futures exchange.

        But if this is what it takes to avoid having legislation drafted by the Senators who are owned by the banksters...so be it.

        •  If a Beltway "turf war" gets going, (0+ / 0-)

          everything else will take a back seat to it, and nothing will get done.  The Ag Committee has had this little fiefdom from time immemorial (and long before there was any federal securities regulatory presence), so hopefully the expertise with respect to financial issues is there, down at the staff level if not so much the members themselves.

          Logically, securities and derivatives trading are so intertwined in the market today that regulation by the same Commission and oversight by the same Congressional committees would make a lot of sense.  But that would discombobulate the campaign fund-raising operations of too many Congressmen, so it isn't going to happen. They have their priorities straight.

  •  I think one of the commenters corrected this: (0+ / 0-)

    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.

    It had been in the works for a few years per the commenter, and this just happened to be the rollout.  So the WSJ noted that it coincided w/ Obama's plan and decided to make hay of it.

    We are building a team that is continuously being built. - Sarah Palin

    by burrow owl on Thu Jun 04, 2009 at 02:50:36 AM PDT

    •  No, today's article in the Times explains it... (7+ / 0-)

      ...Wall Street tried to preempt this over the past 48 hours. (See bold type in my last blockquote from today's NY Times piece.)

      "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

      by bobswern on Thu Jun 04, 2009 at 02:54:26 AM PDT

      [ Parent ]

      •  Gotcha. (3+ / 0-)
        Recommended by:
        Dallasdoc, bobswern, LI Mike

        The rules proposed for margin requirements are crucial, so here's to hoping we get a good set.

        re: capital requirements: how would that work?  CDSs are contingent liabilities, and in some cases the risk of default is extraordinarily remote (sovereign CDSs, for instance).  Is it fair to assume that capital requirements would take the probability of default into account when setting capital requirements?  (I have an accounting background, so finance & capital regulation are a bit of a stretch for me)

        We are building a team that is continuously being built. - Sarah Palin

        by burrow owl on Thu Jun 04, 2009 at 03:04:44 AM PDT

        [ Parent ]

        •  If you really want to read one of the best... (4+ / 0-)
          Recommended by:
          burrow owl, 3goldens, Ken in MN, chrome327

          ...things I've seen on all of this, check this out from yesterday: "Credit Default Swaps and Too Big to Fail or Unwind: Interview With Ed Kane." With your accounting background, I think you're really going to get into this story that I've linked here.

          "I always thought if you worked hard enough and tried hard enough, things would work out. I was wrong." --Katharine Graham

          by bobswern on Thu Jun 04, 2009 at 03:13:28 AM PDT

          [ Parent ]

          •  Couple of good points ... (0+ / 0-)

            Regarding revenue recognition and Exchange vs OTC structures.

            But also a huge amount to gratuitous Obama and Dem bashing ...

            "Self-regulation is to regulation as self-importance is to importance." Willem Buiter

            by Bronxist on Thu Jun 04, 2009 at 06:36:08 AM PDT

            [ Parent ]

        •  Agree that capital requirements are critical (4+ / 0-)
          Recommended by:
          3goldens, xaxado, Badabing, ohmyheck

          It is precisely the point of having capital requirements for writing derivatives contracts that they will increase costs.  The problem with derivatives thus far is that there has been so little cost associated with writing the contracts, and consequently no break to piling them up in their trillions.

          Derivatives contracts are insurance instruments and should be treated as such.  Standardized risk assessments and capital requirements based on those risks (including systemic risks, as we've seen play out in the past year) should be applied.  That will make those contracts more expensive to write and purchase, which is a good thing.  That way they can take their proper, much smaller, place in the financial world.

          Great news about Gensler coming out with these proposals, bobswern.  Thanks for bringing it to us.  Now to watch while the financial lobbyists try to gut the proposal in Congress....

          Godwin is dead. Glenn Beck killed him.

          by Dallasdoc on Thu Jun 04, 2009 at 05:43:49 AM PDT

          [ Parent ]

  •  Dunno bobswern - great diary, but (6+ / 0-)

    This could be a dog and pony show. According to Reuters, the legislation is still very vague:

    The exact structure of the plan has been fluid, with Federal Reserve Chairman Ben Bernanke telling a congressional committee on Wednesday that "the exact structure of the arrangements, I think, remains to be discussed" when asked about the Fed's future role.

    A particularly difficult problem is how to rationalize the four bank regulators -- an issue fraught with turf battles both among the agencies and congressional committees.

    The goal of life is living in agreement with nature. - Zeno

    by yellow dog in NJ on Thu Jun 04, 2009 at 03:04:19 AM PDT

  •  Anyone who thinks serious regulation will come... (2+ / 0-)
    Recommended by:
    Ken in MN, vets74

    I've got some ocean front property in Arizona at bargain basement prices.
    Act now!
    Shady operators are standing by!

    St. Ronnie was an asshole.

    by manwithnoname on Thu Jun 04, 2009 at 04:04:07 AM PDT

  •  "Self policing" By Wall Street? HAHAHAHAHA (6+ / 0-)

    "... Wall Street attempted to preempt this effort by proposing self-policing initiatives over the past 48 hours...."
    Aw come on, 'fess up: you put that line in there just for laughs.

    If Liberals really hated America we'd vote Republican

    by exlrrp on Thu Jun 04, 2009 at 04:07:18 AM PDT

    •  BREAKING::: self-regulation czar George Anderson. (0+ / 0-)

      The perfect Wall Street Cowboy.

      Trained during a night time drive-by down Water Street in January, 2008. 60 m.p.h, way drunk DUI, did a hit-and-run.

      Killed Florence Cioffi.

      Got himself a 15-day sentence in Rikers and a $500 fine. Homicide, sure. Best justice that money can buy.

      Video of the killing was suppressed. Watching Flo fly through the air never got to youTube. Or to Court.

      Great choice to head the Derivatives Futures Market of the United States. Much nodding of agreement noted at the sell-side brokerages.....

      Self-regulation... Quis custodiet ipsos custodes? — Juvenal.... Well, Juvenal be damned. Wall Street Cowboys forever !

      Droogie is as Droogie does....

      by vets74 on Thu Jun 04, 2009 at 07:57:05 AM PDT

      [ Parent ]

  •  Just a couple questions for Bob or anyone else. (3+ / 0-)
    Recommended by:
    xaxado, Ken in MN, chrome327

    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.

    What is the benefit of having them when no one can understand them?

    Is the transparency portion of reform get lost here?

    "...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."

    When regulators have failed in the past why are we to trust them now?

    Are there any plans of FBI investigations into these regulatory agencies?

    Just some of the obvious questions from a novice.

    It wasn't until we had investigations of wall street that we were able to see real reform of banking - it summoned the public will to hold congress and the banks accountable. It will probably be required now as it was in the past.

    "What is the robbing of a Bank compared to the FOUNDING of a Bank?" Bertolt Brecht

    by thethinveil on Thu Jun 04, 2009 at 04:29:19 AM PDT

  •  Just Wait Until (2+ / 0-)
    Recommended by:
    xaxado, Badabing

    the derivative market blows up in their face.
    Just like the Motrgage securities market.
    Regulations and transparency - Absolutely Not.
    Bail them out when they screw things up - Absolutely.
    The criminals on Wall Street have taken the entire
    world financial system for a very bumpy ride. And
    it will be the little people that end up paying the
    price.

    On Giving Advice: Smart People Don't Need It and Stupid People Don't Listen

    by Brian76239 on Thu Jun 04, 2009 at 07:00:04 AM PDT

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