Derivatives trading could be moved to exchanges

Edward Wyatt writes for the New York Times online that when the Senate Banking Committee passed its financial overhaul bill the committee left the derivatives section to be addressed at a later date. It appears that date may be approaching.

The Senate Agriculture Committee has jurisdiction over the Commodity Futures Trading Commission (CFTC), which regulates many derivatives, and on Tuesday Senate Agriculture Committee Chair Blanche Lincoln (AR) said "she would propose legislation requiring nearly all users of derivative contracts to trade on centralized exchanges and possibly ordering banks to segregate their business in derivatives into separate subsidiaries," reports Wyatt.

Lincoln also noted in a letter sent to Senator Olympia Snowe (ME) that the bill would only include a narrow exemption from the proposed requirements for the trading and clearing of derivatives to go through a "centralized facility." The exemption would be for "users of an asset like jet fuel or soybeans who are hedging 'legitimate commercial risk,"' and would not be available to speculators.

Wyatt reports that the derivative issue has been one of "fierce" debate from lobbyists because derivatives are so profitable to Wall Street. Unregulated derivatives, like credit-default swaps and collateralized debt obligations contributed to the housing and financial crisis.

According to Wyatt, the proposed Senate legislation is more strict than the House-passed financial bill, which means the intense lobbying is likely to continue well into the future.

To read the Wyatt article in the New York Times online, click here.
To learn more about agricultural derivatives and the CFTC, click here to check out the National Agricultural Law Center's resources on the topics.
To read a Wall Street Journal article on derivatives trading, click here.

Posted: 04/14/10