Saturday, February 27, 2010

Update On Derivatives Legislation

Well, most of these type stories I grab off of Bloomberg, but this is a nice little update on finance legislation progress from Reuters.  It shows four Senators on the correct side of the issue, but it's not as positive as it looks at first glance.  The problem is four Senators do not a passed law make.  So... it's good to see those 4 Senators on the right team, but still you have to get the law past the old white curmudgeons Dick Shelby and Bob Corker, both of whom are fighting against any real form of financial reforms.

But let us give kudos to 4 Senators here: Maria Cantwell, Byron Dorgan, Diane Feinstein, and Olympia Snowe.  They wrote a letter to Senate Banking Committee Chairman Chris Dodd asking that there be no exemptions of any type of trader of derivatives.  The Senate Agriculture Committee has a competing bill, which like the House (House of Representatives) bill, asks for exemptions of certain types of traders in the $300 trillion OTC swaps market.  In their letter, the four Senators argue vehemently against the exemptions of those companies, and here I quote the letter directly from the Reuters story:
"If the federal government fails to impose systemic risk controls on derivatives traders, these traders will continue to shift substantial systemic risk onto federal taxpayers," The letter is dated February 12.
The letter went on to say that if all transactions of swap dealers are not cleared, it could lead to problems in energy markets (similar to what happened in California in 2000--20001).  The lawmakers said that clearing of the trades would still allow utilities and airlines to hedge risks freely, and would NOT necessitate blanket exemptions for those industries.

The four lawmakers also said developers of new derivative products must prove the need for exemption from clearing trades on an exchange.  (my italics)

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