Regulator faults Wall Street banks on derivatives
WASHINGTON – Wall Street banks are seeking exemptions to proposed new financial derivatives rules that could shield more than half the trades that should be subject to disclosure, a federal regulator said Thursday.
The chairman of the Commodity Futures Trading Commission, Gary Gensler, criticized Wall Street’s stance on proposed new oversight for the shadowy $600 trillion derivatives market. Derivatives have been blamed for hastening the 2008 financial crisis.
Gensler told a financial industry gathering that Wall Street has not been “enthusiastic” about the proposed new regulations now before Congress.
His comments came as the leaders of France, Germany and Greece called for a clampdown on the kind of speculative trading in derivatives blamed for worsening Greece’s debt crisis and undermining the European currency recently. A nationwide strike in Greece Thursday to protest the cash-strapped government’s austerity measures — the second strike in a week — brought the country to a virtual standstill.
Gensler, in several speeches in recent days, has been renewing his call for new regulation aimed at bringing transparency to, and prevent manipulation in, the sprawling global derivatives market. At his address Thursday to the meeting of the Futures Industry Association in Boca Raton, Fla., he also got in some mild barbs at Wall Street.
Billions in trading profits for the big investment banks could be threatened by new rules for derivatives, which passed the House in December as part of the overhaul of financial regulation and is now before the Senate. Many in the financial industry have indicated support for requiring derivatives trades to go through clearinghouses, “that is, as long as it only applies sometimes,” Gensler said.
While more than 1,000 U.S. banks trade derivatives, five big Wall Street institutions — JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. — account for about 97 percent of the total reported to be held by U.S. banks.
“Wall Street appears to be aligning themselves with corporate end users in an effort to exempt customer transactions from central clearing,” Gensler said. “Wall Street seems to be making the case” that banks using derivatives to hedge against risk should be exempt from having to use clearinghouses in the same way as derivatives trades involving companies, he said. Only about 9 percent of derivatives trades involve companies using them as a hedge — which Gensler and other regulators consider a legitimate exception from the clearing requirements.
The exception the banks are seeking, he warned, could leave hidden 60 percent of the derivatives trades that rightfully should go through clearinghouses because they aren’t customized transactions designed for companies.
“Let there be no mistake: Wall Street has not been enthusiastic about this reform,” Gensler said in the text of his speech. “After the worst crisis in 80 years, though, we need real reform that protects the American public.”
The value of derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.
Companies of all kinds use derivatives to hedge against risks — airlines ensuring against spikes in fuel prices, for example. A potent coalition of nearly 200 companies that use derivatives — including Boeing Co., Caterpillar Inc., Ford Motor Co., General Electric Co. and Shell Oil Co. — has lobbied Congress to make the case that legislative proposals to regulate derivatives could severely increase costs for corporate America.
Financial institutions that deal in derivatives “are opposed to mandatory clearing for corporate customers” because banks say it would have the effect of discouraging companies from using swaps to manage risks, Cory Strupp, managing director for government affairs of Wall Street’s biggest lobbying group, the Securities Industry and Financial Markets Association, said Thursday.
Credit default swaps, a form of insurance against loan defaults, account for an estimated $60 trillion of the worldwide derivatives market. The collapse of the swaps nearly toppled American International Group Inc. in the fall of 2008, prompting the government to support the insurance conglomerate with about $180 billion in aid. The swaps have come under heightened scrutiny in recent days against the backdrop of the Greek financial crisis, with Greek officials blaming speculators’ use of them to bet against Greece’s debt for hiking the country’s borrowing costs.
In Europe Thursday, French President Nicolas Sarkozy, German Chancellor Angela Merkel and the leaders of Greece and Luxembourg called for a crackdown on credit default swaps and asked European Commission President Jose Manuel Barroso to launch an investigation into their role in the trading of government bonds in European nations.
The leaders also called for mandatory reporting of all derivatives trading in Europe and said the EU should consider banning speculative trading in credit default swaps.
Gensler, in an address in New York on Tuesday, said that imposing new oversight on derivatives would “greatly reduce” the risk posed by credit default swaps, although “additional reforms … should be considered to address the unique characteristics” of the swaps.
If Congress decides to exempt from the new rules some derivatives transactions used by companies to hedge against risk, he said, “there should be no such exemption for” credit default swaps, which are conducted almost entirely between financial institutions.
“The recent chill winds blowing through Europe, including press reports that Greece used derivatives to help mask its fiscal health, are reminders of the pressing need for comprehensive regulation,” Gensler said in his speech Thursday to the futures industry gathering.
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