Barney Frank’s Derivatives Bill Draft Allows OTC Trades to Bypass Exchanges

October 7, 2009 by · Leave a Comment
Filed under: Policy News 

Is this the signal of what is to come from all the “reform” that we are suppose to see?  Will all these new financial regulation reforms be watered down and have exemptions that allow the same systemic events?  We did the bailout against popular opinion we created a form of “moral hazard” sending the signal that as long as you create a systemic risk to the financial system, you will be bailed out and this is the precedent we are left with for the future.  Now when it comes down to closing loopholes in rules or putting regulation in place to prevent this from happening again, are we going to fail at this as well?  Look at the two links below and you can read through the bill and guideline yourself.

Bloomberg, New York – Legislation proposed by U.S. Representative Barney Frank would weaken an Obama administration guideline requiring the most common private derivatives to be traded on exchanges or regulated systems.

The Massachusetts Democrat, who heads the House Financial Services Committee, released a draft bill Oct. 2 that allows for no change in how standardized over-the-counter derivatives are currently traded as long as they are reported to regulators. The Obama plan, released in August, specifies “mandatory trading” on exchanges or swap-execution platforms that would have to be registered with the Commodity Futures Trading Commission or the Securities and Exchange Commission.

“Nothing will really change” the way trades are executed under Frank’s draft proposal, said Kevin McPartland, a senior analyst in New York at TABB Group, a financial-market research and advisory firm. “There’s no reason, at least that I can see, why anybody would go to an exchange.”

Frank’s exemption would allow the CFTC or SEC to make rules on record-keeping for swap trades based on credit, energy or interest rates, according to the draft legislation. Foreign regulators also could set record-keeping rules for dealers or “major” swap participants, defined as any firm that has taken a substantial net position through the contracts for reasons other than hedging.

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