After following the sausage-tastic construction of healthcare reform over the past year, no one should be surprised to learn that financial regulatory reform is likely to be even harder to get right. After all, the finance lobby is bigger and more pervasive than the medical lobby. What’s more, they benefit from the fact that they frequently lobby for things so arcane that no one really understands them.
Take derivatives. (Please.) One of the key changes that reformers want to see is a regulation that requires credit derivatives to be traded on an exchange, just like stocks and pork belly futures. It wouldn’t solve all the world’s problems, but it would add a layer of transparency to the derivatives market that would help regulators keep a better handle on brewing problems.
Barney Frank agrees, and so the House bill includes a section that requires credit derivatives to be traded on an exchange. Except there’s an exception for “end users” who want to buy things like currency hedges as part of their day-to-day business, not as a financial speculation. That’s basically fine. But the exception was worded in a way that would allow pretty much anyone to claim they were an end user doing real hedges, not speculation. So after a big fight the wording was changed. Hooray!
But as Nick Baumann reported the other day, the Project on Government Oversight says that a subsequent amendment may gut the rule yet again. It allows derivatives to be traded on either an exchange or a “swap execution facility.” Mike Konczal explains further:
First the definition of a swap execution facility has been expanded to include “a person” (different from the “or entity”). It’s also expanded to an “or trading” definition, and includes voice brokerage firms….This could, quite simply, be a telephone over which two people trade a derivative (with one person declaring himself to be the exchange?).
….[Another sentence] allows an intermediary to execute a swap, ignoring the section 2(k) which is the meat of the reform, as long as the swap is recorded somewhere. Now we already have, from above, that a swap execution facility can be something other than the exchange. This is a rule that guts the regulation right out the door, and for no apparent benefit to reform. Many of these alternative swap facilities will be owned by the banks, so it won’t necessarily force the price transparency that has been promised. To trust regulators to simply do the right thing is naive at best when the ability to follow fixed rules is available.