The House Financial Services Committee just approved rules on financial regulatory reform governing derivatives, the often-unregulated, high-risk gambling market that basically accelerated the crash of the global financial system. The Committee approved the measure on a party-line vote of 43-26.

New rules for the largely unpoliced, $450-trillion over-the-counter derivatives market were approved by a key congressional committee on Thursday in a win for the Obama administration.

The House of Representatives Financial Services Committee voted largely on party lines in favor of the rules after months of intense lobbying by major banks and corporations to shape legislation proposed by the administration and modified in recent days during House debate.

Large exemptions to these new rules on derivatives appeared sometime between the Obama Administration’s original white paper and the legislative language shortly thereafter. On a conference call for Americans for Financial Reform, a coalition of over 200 groups working to preserve real reform of the system, Univ. of Maryland professor and former Commodity Futures Trading Commission official Michael Greenberger said that the two major exemptions included:

1) any derivative traded on foreign exchanges, and
2) any trading with a “counterparty not a member of a clearing facility,” i.e. any member of a non-bank.

The Administration’s own head of the CFTC, Gary Gensler, said that these provisions would “swallow the whole” of derivative reform, the exemptions being so broad that they would ensure that the rules wouldn’t cover the majority of trades. Harold Meyerson has more on the faulty nature of this regulation. However, Barney Frank moved yesterday to tighten up those exemptions.

Administration officials had criticized Frank’s original proposal at a hearing of the panel Oct. 7. That version “could unintentionally preserve existing regulatory gaps,” Henry T.C Hu, director of the Securities and Exchange Commission’s division of risk, strategy and financial innovation, said in testimony.

Gary Gensler, chairman of the Commodity Futures Trading Commission, called the loophole an “unintended consequence” that could exclude from oversight all hedge funds as well as large derivatives users such as mortgage-finance companies Fannie Mae and Freddie Mac.

The House panel responded by passing an amendment yesterday redefining “major swap participants.” Derivatives users large enough to “expose counterparties to significant credit losses,” such as Fannie Mae and Freddie Mac, would meet Frank’s revised definition and wouldn’t be eligible for an exemption.

The latest plan still excludes from new rules most “end- users,” corporations that use derivatives to mitigate their operational risks, such as a rise in oil prices or fluctuations in currency rates.

While these regulations are improved, they don’t totally rein in the derivatives market, as the definition of “end-user” could be meant to encompass all kinds of firms.

This is part of an unnerving pattern, where the banks who “own the place” – and pay a handsome sum in lobbying money for their purchase – use their clout to stop the Congress from enacting meaningful reform. Just this week, the Administration shelved a plan for corporate tax reform after howls of opposition from business and the liars over at the Chamber of Commerce (they have 300,000 members, not the 3 million they tout, not that anybody but Mother Jones bothered to look). And as Masaccio has said, New Democrats are trying to put a pre-emption clause to gut the power of the Consumer Financial Protection Agency. Meanwhile the same banks are poised to rake in record pay this year.

Today’s action is decent, but certainly bears watching as it goes through the meat grinder of Congress.

…Americans for Financial Reform, a coalition of over 200 consumer groups, released this statement:

While we appreciate the work Chairman Frank is doing to bring financial reform legislation to the floor, Americans for Financial Reform, and our 200 coalition members, support opening up the derivatives markets with exchanges and insisting on tough prohibitions against fraud, manipulation, and excessive speculation. The draft and proposed amendments do not meet the necessary standards of transparency and accountability. It does not do enough to protect taxpayers and our economy.

David Dayen

David Dayen