WASHINGTON (5/17/13)--Federal regulators have decided to relax a rule aimed at curbing large banks' domination of the derivatives market, which was a prime cause of the financial crisis.
The rule changes announced Thursday could allow a few big banks to continue controlling derivatives--a $700 trillion market involving contracts that derive their value from an underlying asset such as an interest rate or bond. The market allows firms to either protect against risk or speculate in the markets (The New York Times May 15).
Five banks hold more than 90% of all derivatives contracts, the Times said.
In 2008, that dominance of such a huge and critical market by just a few players was criticized because derivatives contracts caused insurance behemoth American International Group to nearly implode before the government bailed it out, the Times said.
After the 2008 crisis, regulators initially intended to make asset managers contact a minimum of five banks when looking for a derivative contract price--a move geared toward engendering competition among banks, the Times said. Now, the Commodity Futures Trading Commission has agreed to lower the standard to two banks, according to officials briefed on the matter.
Within 15 months from today, the standard will automatically increase to three banks, the officials added. The new rule, created by the trading commission, also specifies that large volumes of derivatives trading must shift to regulated trading platforms that resemble exchanges, from the current privately negotiated deals, the Times said.
In a related matter, it was announced Thursday that well-run federal credit unions would be permitted to use simple derivatives to hedge against interest rate risks under a just-proposed National Credit Union Administration program (News Now May 16).
Only credit unions that have assets of more than $250 million, are well-managed, and have the appropriate expertise will be eligible to apply for an agency derivatives investment program, under the terms of the NCUA proposal. The agency will seek comments for 60 days on the proposal. (See related News Now story, NCUA Releases CU Derivatives Program Proposal.)