THE COMMISSION SENT A LOUD MESSAGE TO WALL STREET: NO MORE DARK MARKETS AND NO MORE PREDATORY BEHAVIOR
- By BEN PROTESS
Regulators Approve New Derivatives Rules
Regulators approved new rules for the $600 trillion derivatives market on Tuesday, aiming to raise competition and impose more rigorous risk management on an industry that played a central role in the financial crisis.
The Commodity Futures Trading Commission adopted the rules in a 4-to-1 vote, the agency's latest move to usher in broad new changes in response to the crisis. While the rules are among the most arcane provisions to come from the Dodd-Frank financial regulatory overhaul, officials say the changes will impose crucial new oversight on the derivatives industry.
"Though it is quite technical, and some might say it's sort of into the plumbing of the derivatives marketplace, these rules today are critical to promote access, lower risk, and ultimately help in transparency in the market," Gary Gensler, the commission's chairman, said at a public meeting in Washington on Tuesday. "Our country will benefit from financial reform, and in fact, in addition the financial side of the economy will also benefit from greater transparency and competition in the derivatives markets."
Mr. Gensler, a Democrat, highlighted how the rules would mandate broader competition in the derivatives industry, which is currently dominated by a few big banks. JPMorgan Chase, Citigroup, Bank of America and Goldman Sachs currently hold roughly 95 percent of the banking industry's total exposure to derivatives contracts, according to government data. Now banks will be unable to restrict customers from trading with other players in the derivatives market.
The commission's overhaul also attempts to streamline how trades are processed, setting a standard that clearinghouses must accept or reject trades "as quickly as would be technologically practicable," or a matter of "milliseconds or seconds."
"This lowers risk to the markets by minimizing the time between submission and acceptance or rejection of trades for clearing," Mr. Gensler explained.
The new measures impose a battery of risk-management rules on banks and other firms that trade derivatives. Under the regime, firms must conduct "stress tests" of all potentially risky customer positions, evaluate their ability to meet margin requirements every week and test all lines of credit yearly.
Scott D. O'Malia, a Republican member of the commission, cast the lone dissenting vote, saying the agency was failing to evaluate the economic costs. "We still suffer from the lack of quantitative analysis," he said.
But proponents of financial regulation cheered.
"The commission sent a loud message to Wall Street: no more dark markets and no more predatory behavior," Dennis Kelleher, the leader of Better Markets, a nonprofit advocacy group, said in a statement.
