The federal regulator overseeing trading in derivatives -- an opaque realm worth hundreds of trillions of dollars at the center of the global financial crisis -- is moving to loosen proposed new restrictions, rendering the markets vulnerable to fresh instability, said advocates for greater scrutiny.

A proposal that would allow continued private trading of derivatives with less transparency for market participants is being pressed by at least three commissioners on the five-member Commodities and Futures Trading Commission -- two Republicans and one Democrat -- according to sources familiar with the deliberations. The body’s chairman, Democrat Gary Gensler, opposes the measure, these sources said.

“The banks have been intensely lobbying to keep it as it is,” said R. Raymond May, founder and CEO of derivatives trading firm Odex. He said the rule being considered by the CFTC “doesn’t change anything from what we had before.”

Marcus Stanley, policy director of Americans for Financial Reform, an advocacy group in Washington, said the proposed change amounts to watering down rules intended to avoid another calamitous financial crisis.

“This keeps the swaps markets looking very similar to where they are today,” Stanley told the Huffington Post. “All this dangerous activity would remain concentrated within a few -- five or six -- too big to fail banks that are so central to the economy. The markets would remain unstable, which threatens everyone.”

Trading in credit derivatives proved seminal in the wave of panic that threatened much of global finance in 2008. Amid an American housing boom, major investment banks bought and sold mortgages in a lucrative trade that became worth trillions of dollars. They sliced and diced home loans into bonds, and then bet on increases and decreases in the value of those bonds via exotic instruments known as derivatives -- meaning investments linked to the value of some other good.

At the height of the boom, some $203.5 trillion worth of derivatives was in circulation in global markets. As housing prices dropped and homeowners fell into delinquency, many of the bonds constructed of mortgages became worthless, bringing down the derivatives linked to them. Financial institutions such as the insurance giant AIG and the investment bank Merrill Lynch found themselves on the hook for tens of billions of dollars in losses they could not cover, resulting in taxpayer bailouts.

As the markets absorbed the reality that many lenders faced similar straits, financial markets recoiled, making money tight even for creditworthy households and businesses, and turning an ordinary recession into the worst economic downturn since the Great Depression.

The Dodd-Frank financial reforms adopted by Congress in 2010 were aimed at preventing a replay of that scenario. The law tasked the CFTC with creating a new marketplace in which banks would trade derivatives openly, with their positions disclosed to the public.

Previously, trading had occurred mainly over the telephone, in private deals between large players. Congress mandated that most of the trading should be restricted to a central computerized market, a “central limit order book” in industry jargon.

But a key exception granted traders of very exotic or large derivative positions the right to exchange their wares privately. Critics said that would reduce transparency and benefit the biggest banks that dominate the field.

In an effort to limit the scope of the trading that could take place under that exception, regulators initially proposed that derivatives traders doing business outside of a central exchange would have to involve at least five so-called counterparties, meaning investors taking the other side of a trade.

Now, according to people with knowledge of CFTC deliberations, commissioners are pressing a rule that would allow traders to negotiate the sale of derivatives privately, outside the exchange, even when there are only two other counterparties.

“There were significant compromises made in the Dodd-Frank Act,” said Stanley, the financial reform advocate. “Then the initial proposed regulation had an additional compromise. Then industry lobbyists complained those proposals were too extreme. Now, we’re ending up very close to where we were in 2008.”

People inside the CFTC who spoke on condition they not be named said the key swing player in the latest development is Democratic Commissioner Mark Wetjen, who is aligning himself with the two Republican commissioners on the panel to pass the latest proposal. Where the other Democratic commissioner, Bart Chilton, stands on the issue remains unclear, these sources said.

Wetjen and Chilton declined to comment. The CFTC sources said Wetjen has embraced the proposal as a way to address what he portrays as the difficulty of restricting derivatives trading to exchanges. Wetjen has contended the original threshold of five counterparties would have prompted banks to find loopholes around the regulation, these people said.

Dennis Kelleher, an advocate for financial reform who leads a Washington-based non-profit Better Markets, argued that the real motive of the change is to enable Wall Street to continue its profitable, but reckless, gambling on derivatives.

“As we said to Commissioner Wetjen and other commissioners in recent meetings, gutting the … rules will only help Wall Street’s biggest banks continue to control the marketplace and will defeat the purposes of financial reform,” Kelleher said in a written statement. “The law was passed because Wall Street caused the biggest financial collapse since the Great Crash of 1929 and has inflicted the worst economy on the U.S. since the Great Depression. Financial reform is supposed to prevent that from happening again. The CFTC must stand up to Wall Street, reject self-serving, profit-maximizing arguments, and protect the American people.”

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