CFTC adopts weakened rule on derivatives trading
WASHINGTON – A rule intended to loosen the largest U.S. banks’ control over the trading of complex investments and help safeguard the financial system was weakened Thursday by regulators.
Critics say the changes will allow major Wall Street banks to continue to dominate the $700 trillion derivatives market.
The Commodity Futures Trading Commission approved the rule on a 4-1 vote. Commissioner Jill Sommers cast the lone dissenting vote.
Under the rule, investment firms would be required to request price quotes for a derivatives contract from only two banks this year and three beginning in 2014. An earlier proposal had called for price quotes from five banks.
Derivatives are investments whose value is based on some other investment, such as oil. The market was largely unregulated before the 2008 financial crisis. The rule was mandated under the 2010 financial regulatory overhaul.
By requiring fewer price quotes, critics worry that the market will be less competitive. Five of the largest U.S. banks – JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. – account for more than 90 percent of total derivatives contracts.
Dennis Kelleher, the president of Better Markets, a group that advocates stricter financial regulation, said banks opposed the requirement for more price quotes “to prevent a level playing field, competition and transparency.”
Under the rule, banks and other financial institutions would be required to trade derivatives contracts on new electronic exchanges.
CFTC Chairman Gary Gensler says that will create more transparency because everyone who wants to compete in the marketplace will be able to see prices before deciding to invest. Prior to the rule, they could not.
“This is a significant shift toward market transparency from the status quo,” Gensler said.
Commissioner Bart Chilton said the commission could have achieved greater transparency by approving the original proposal. But he said a compromise was better than no action.
“By failing to act, we leave in place unregulated dark markets. These are the very dark markets that got us into the economic mess in 2008,” Chilton said.
Wall Street banks had opposed the higher number of bids. The lower requirement illustrates how banks have managed to tweak rules written by Congress three years ago that are still being finalized by regulators.
The banks have also succeeded in weakening a rule that would ban banks from trading for their own profit. The latest version of the so-called Volcker Rule includes an exemption for banks to make such trades when they are used to offset others risks taken.
The rule was named after former Federal Reserve Chairman Paul Volcker. Its adoption has been delayed largely because of the banks’ objections.