AMERICAS: US, EU to rein in murky derivatives trading

Efforts to craft a financial services regulatory reform bill in the US that will place restrictions on the US$450 trillion derivatives market moved forward recently with the passing of crucial amendments through the country’slegislature. Two pieces of legislation — one in the US Senate and the other in the House of Representatives — if passed […]


Efforts to craft a financial services regulatory reform bill in the US that will place restrictions on the US$450 trillion derivatives market moved forward recently with the passing of crucial amendments through the country’slegislature.

Two pieces of legislation — one in the US Senate and the other in the House of Representatives — if passed would mean a large part of the derivatives transactions conducted by big banks, hedge funds and other corporations in the US would for the first time be required to go through transparent clearinghouses, which are intermediaries between buyers and sellers of swaps. Many institutions would have their transactions subject to new reporting and capital requirements and also have to put their contracts through exchanges or swap-execution facilities.

Both the House and Senate would exempt many commercial end-users of derivatives, such as airlines and manufacturers, from the clearinghouse requirement. The House would also exempt pension funds and many hedgefund investors that are hedging balancesheet risk, as well as the $60 trillion foreign-exchange market.

Proponents of the new oversight have blamed credit default swaps, a controversial insurance derivative product, as central to the financial crisis.

Similarly, the European Union’s top financial official said he will draft new rules to create more oversight of derivatives trading. Financial services commissioner Michel Barnier said the new rules could mean fines for market abuse in what has been largely unregulated trading.