As Congress crafts legislation to impose new oversight on complex instruments blamed for hastening the financial crisis, a Senate panel is hearing from the Treasury secretary and futures-industry executives on regulating derivatives.
Legislative proposals in the House and Senate are designed to bring transparency to and prevent manipulation in the global, unregulated $600 trillion derivatives market.
Credit default swaps, a form of insurance against loan defaults, account for an estimated $60 trillion of that market.
The collapse of the swaps brought the downfall of Wall Street banking house Lehman Brothers Holdings Inc. and nearly toppled American International Group Inc. last year at the height of the crisis, spurring the government to support the insurance conglomerate with about $180 billion in aid.
The Senate Agriculture Committee is scheduled to hold a hearing at 9:30 a.m. EST Wednesday. Treasury Secretary Timothy Geithner is slated to testify. So are executives of CME Group Inc., owner of the Chicago Mercantile Exchange; the Intercontinental Exchange; and JPMorgan Chase & Co., one of a handful of Wall Street institutions that dominate derivatives trading.
The value of derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.
The Obama administration's proposal is close to legislation in the House, requiring most derivatives trades to go through clearinghouses to bring transparency, and subjecting financial firms dealing in the instruments to new capital requirements.
Geithner has said that regulating derivatives would reduce risk to the financial system and help companies that rely on the instruments save money, and he has urged Congress to move quickly on its comprehensive overhaul of the nation's financial-rule system to ensure economic stability.
A major sticking point in Congress involves companies that use derivatives to hedge against risk. Some lawmakers want to exempt the so-called "end users" from new financial requirements in the overhaul legislation.
A potent coalition of about 170 end-user companies — including Boeing Co., Caterpillar Inc., Ford Motor Co., General Electric Co. and Shell Oil Co. — has been lobbying Congress with the message that regulation of derivatives without exceptions could severely increase costs for corporate America. That could mean higher costs passed on to consumers and imperiled jobs, they contend.
Several senators on the Agriculture Committee have expressed support for that view. But Gary Gensler, chairman of the Commodity Futures Trading Commission, has said that if Congress decides to exempt some end-user transactions, the exception should be "explicit and narrow."
Sen. Jack Reed of Rhode Island, a member of the Senate Banking Committee and its lead Democrat on derivatives legislation, said Tuesday he doesn't believe in spelling out a series of exceptions and appears to take Gensler's admonition to heart.
However Sen. Blanche Lincoln (D-Ark.), the Agriculture Committee chairman, has signaled her intent to draft a bill to regulate derivatives which could provide for broader exemptions.
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