"Regulator to Detail Plan for Derivatives
WASHINGTON — The new chairman of the Commodity Futures Trading Commission will ask Congress on Thursday to impose substantial new costs and restrictions on large banks and other financial institutions that deal in the complex and largely unregulated financial instruments known as derivatives.
Gary G. Gensler, the top regulator for futures trading, will provide significant new details of a plan announced three weeks ago by the Treasury secretary, Timothy F. Geithner. Mr. Gensler will disclose his proposal before the Senate Agriculture Committee, which oversees the commission.
Lawmakers said they had been told that Mr. Gensler would propose two sets of regulations — one set for the individual dealers of derivatives and a second set for the marketplaces where the instruments are traded.
Mr. Gensler has said that taken together, the two sets of rules would largely eliminate the loopholes that critics said would have weakened the Treasury secretary’s plan, although some expressed concern that the proposals still might not go far enough to fully address problems that contributed to the market collapse.
If adopted, Mr. Gensler’s proposal would fundamentally alter the way that derivatives dealers do business by imposing requirements, for example, for capital reserves and collateral — assets that would be forfeited in a default. The rules would impose significant new expenses on derivatives dealers, and could reduce their profitability.
Mr. Geithner said his proposal recognized the significant role that unregulated derivatives, particularly credit-default swaps, played in the financial crisis. Such swaps, a form of insurance against the default of a bond, played a central role in the near collapse of the American International Group last year. Rather than limiting risk as they are supposed to do, the swaps wound up spreading the crisis globally.
The plan is expected to run into sharp resistance from the industry, which this week proposed its own set of voluntary rules as part of an effort to head off more aggressive legislation. Some lawmakers who applauded Mr. Geithner’s plan said they intended to press Mr. Gensler to be more aggressive in policing the marketplace even before Congress completes work on the derivatives legislation.
“Gensler has to show that the C.F.T.C. will have teeth and we can implement some things right now,” said Senator Maria Cantwell, Democrat of Washington. She said she had asked Mr. Gensler in recent days to revoke exemptions given to some oil futures traders through what are called no-action letters that she said could permit the manipulation of prices to consumers.
“He laments that Wall Street will be pushing back on the plan proposed by the administration and him. I told him they could get a quick gold star by revoking the no-action letters,” she said.
Some longtime critics of the absence of regulation of the derivatives markets applauded Mr. Gensler’s approach.
“I’m very enthusiastic about it,” said Michael Greenberger, a professor at the University of Maryland Law School who has been critical of the lack of regulation of the market and is a former director of trading and markets at the commodities futures commission. “There has never been a proposal before to regulate the swaps dealers.”
But Frank Partnoy, another longtime critic of the lack of derivatives regulation, said the administration’s plan did not go far enough. “Disclosure to regulators will not be particularly useful,” said Mr. Partnoy, a professor at the University of San Diego School of Law who has written extensively about derivatives regulation. “We’ve been through decades of watching regulators chase innovation and fall progressively further behind.”
The proposal on swaps dealers would include antifraud and antimanipulation provisions as well as potential limits on market positions and holdings. It would apply regardless of whether a dealer issued standard derivatives or specially tailored ones to meet the needs of specific companies.
One major criticism of the Geithner plan was that it would permit less regulation of some of the more complicated derivatives that are custom-written, rather than plain-vanilla instruments, and would open a loophole that would keep much of the market unsupervised and opaque.
But Congressional officials said Mr. Gensler, in his testimony, would describe mechanisms to both supervise the marketplace of customized derivatives and impose standards that presume most derivatives are standard and subject to more rigorous oversight. For instance, any derivative accepted by a clearinghouse for settlement would be presumed to be a uniform derivative, not a customized one."