Derivatives Markets will continue to operate without oversight
May 1, 2011
3M and Cargill are on the list of corporations that asked to be exempted from recently passed laws.
Treasury Secretary Timothy Geithner has decided to let companies continue to trade certain contracts used to guard against swings in currency values outside regulators’ view.
New rules require that many such trades happen more transparently, on exchanges where regulators can see them. But Geithner is exempting certain contracts used by companies to hedge currency rates.
The new financial overhaul law authorized Geithner to carve out such an exemption to stricter regulation.
Business groups argue that tighter oversight of such contracts would be costly and unnecessary. But critics, including some regulators, counter that the whole market for financial contracts called over-the-counter derivatives should face stricter supervision.
The value of derivatives hinges on an underlying investment, such as currencies, stocks or mortgages. Speculators who used over-the-counter derivatives helped fuel the 2008 financial crisis.
Sen. Carl Levin, who pushed for tighter regulation after the crisis, said Geithner’s decision might open the door for lax oversight in the future.
Treasury’s top markets official said the contracts already include many of the safeguards the new rules impose. Investors can find information on the price for each contract, for example. Some of the contracts are traded on electronic platforms, which are less likely to freeze up after an unexpected financial shock.
Imposing new rules would mean “introducing an additional process into what is a very well-functioning market today, and you would be putting more steps into the settlement process,” said Mary Miller, assistant Treasury secretary for financial markets.
Miller argued that even with the exemption, the market will become more transparent. Companies will have to report the contracts in real time, after they make a trade. The information will go to central databanks that regulators can see.
Still, the contracts, called foreign-exchange swaps, wouldn’t be subject to other requirements that experts say would make them more transparent.
The contracts that Geithner carved out account for about $30 trillion of the $600 trillion global market for over-the-counter derivatives, Treasury said. The new, tougher rules will apply to currency swaps, options and other contracts used for similar purposes.
Multinational corporations such as Cargill and 3M argued for the exemption. They said the new rules would have raised their costs, thereby limiting their ability to grow and create jobs.
Advocates of tighter regulation say closer oversight is needed at each stage of the process — before, during and after a trade. They say the exemptions will make some types of trades harder to oversee.
Michael Greenberger, a former official with the Commodity Futures Trading Commission, which is responsible for policing much of the derivatives market, disputed Treasury’s main defense of the exemption — that the contracts expire so fast that they don’t pose serious risks to the financial system.
“Within the next 60 months, there will be a systemic break in this market, said Greenberger, now a law professor at the University of Maryland.
The decision technically is a proposal. Treasury will accept public comments for 30 days before finalizing the exemption.