How to Regulate Derivatives

Any plan that seeks to reverse the unregulated wild west that derivatives have existed in since 2000 must have a simple beginning: Repeal the Commodity Futures Modernization Act.

This ruinous and corrupt legislation, pushed through by the Bonnie & Clyde of deivatives, Enron Board member Wendy Gramm, and her astonishingly clueless ideologue husband, former Texas Senator (and current UBS member) Phil Gramm, lay at the heart of the current derivatives debacle.

After Greenspan, Gramm is the single most culpable individual in terms of damaging the global economy. He remains in deep denial as to the role he played.

Current legislative proposals fail to treat derivatives like all of other financial instruments. This is the very least any legislation should include.

In addition to the full repeal of CFMA, derivatives should be 1) Traded on exchanges ONLY; 2) counterr parties must be adequately capitalized and transparently disclosed; 3) appropriately reserved for; 4) Where derivatives are acting as insurance, state insurance commissions should have oversight and audit capability;

The current legislation does not do much of this:

“Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules, the head of the Commodity Futures Trading Commission said.

The provision is among several loopholes in the draft legislation, officials of the CFTC and Securities and Exchange Commission said in testimony yesterday before the House Financial Services Committee headed by Frank.

The Massachusetts Democrat said he would “sharpen” his plan, intended to rein in the $592 trillion over-the-counter derivatives market. The committee has scheduled votes on it beginning Oct. 14. Frank predicted the legislation would pass the House by November and be signed into law by December.

A plan offered by the Obama administration would subject all swaps dealers and “major market participants” to new regulations for capital, business conduct, record-keeping and reporting. Frank’s version would exempt corporations from that definition if they use derivatives for “risk management” purposes.”

Its astounding this has not been resolved yet . . .

Source:
Derivatives Bill’s Loophole May Exempt Most Firms, Gensler Says
Tina Seeley and Dawn Kopecki
Bloomberg, Oct. 8 2009
http://www.bloomberg.com/apps/news?pid=20601087&sid=a7fAFtZGaGAk