Panel acts to regulate derivatives; Frank won’t seek any type of ban
WASHINGTON - A key panel moved yesterday to adopt rules on previously unregulated financial instruments, a long-awaited step toward governing the obscure and complex transactions at the heart of the troubles that befell some of Wall Street’s most well-known financial houses.
The House Financial Services Committee was poised to adopt a proposal close to the Obama’s administration’s plan to move most private trading in over-the-counter derivatives to regulated exchanges. Chairman Barney Frank, Democrat of Massachusetts, dropped his proposal for an outright ban on trades that regulators judge detrimental.
While many companies use derivatives to protect themselves against market fluctuations, they have also become a means for financial speculation. They grew into a $600 trillion global market that regulators say can threaten the entire economy.
Frank said exemptions would apply to companies that use derivatives for commercial reasons to protect against risk, not those that use it for financial reasons. Companies could lose that exemption if regulators see a pattern of activity that places other participants in the transactions at risk. Exempt or not, companies also would have to report their trades and the prices.
“There will be no more hidden trades where we don’t know the price,’’ Frank said.
Frank said he was persuaded not to give regulators the power to ban so-called abusive swaps. “There was a concern that a broad grant to ban absolutely abusive swaps was going to be unsettling,’’ he said.
Instead, regulators would be required to oversee transactions and look for potential problems.
Regulating derivatives is one element of President Obama’s proposal for correcting the practices of banks, investment houses, and other financial institutions that caused last year’s economic collapse. Obama also wants a new Consumer Financial Protection Agency to police mortgages, credit cards, and other consumer products - a plan banks and business groups oppose.
Frank intends to have his committee adopt those measures by the end of the week. House Democratic leader Steny Hoyer said yesterday that he would expect the legislation to reach the House floor for a vote in three to four weeks. The Senate has yet to act on the Obama proposals.