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Mark Gongloff

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SEC, CFTC Retreat On Swap Dealer Regulation

Posted: 04/18/2012 1:15 pm

Corporate America, with help from the Obama administration, has struck yet another blow against the scary financial regulations it claims will hurt the economy.

On Wednesday they undercut new regulations on derivatives, which the detail-obsessed among us might point out didn't just hurt the economy but nearly destroyed it. Just a few years ago.

It's just the latest in a growing string of defeats and surrenders by regulators to the same financial industry that helped nearly destroy the economy, and needed massive bailouts as a result. Just a few years ago.

Under heavy pressure from the energy industry and other corporate interests, the Commodity Futures Trading Commission and the Securities and Exchange Commission are retreating from a plan to regulate many reaches of the U.S. trade in financial derivatives known as swaps, including the credit derivatives that nearly brought down the financial system.

The CFTC and SEC voted on Wednesday to decide just who, exactly, should be considered a "swap dealer" in this market. Dealers will be subjected to greater regulation and oversight. Non-dealers get a pass.

Originally these regulators wanted to say that anybody who handled less than $100 million in swaps per year was not a dealer and thus would be exempt from regulatory oversight. This arbitrary number was far, far too low, cried energy companies and other players in the swaps market. After careful consideration, they thought another arbitrary number, say $3 billion, or maybe $8 billion, would be more reasonable.

These companies argued that they dealt in many billions of dollars in swap trades each year -- $3 billion to $8 billion, to be ridiculously precise -- just to hedge their risks of doing business. To subject their trades to the scrutiny of regulators would impose terrible costs that could very well hurt the economic recovery, for goodness' sake.

These groups, using a large and well-supplied army of lobbyists, as Ben Protess of the New York Times noted, cried to regulators that $3 billion -- no make that $8 billion -- was the absolute level of trades that turned one from an innocent bystander in the swaps market into a "dealer" in need of regulation.

And the regulators listened, bless 'em, continuing a recent string of victories for the banking industry, among others, to roll back or confuse regulations passed in the wake of that pesky financial crisis.

Not only did they make it easier for a swaps trader to be exempt from regulation, but they also left it up to individual companies to decide whether their swaps trades were commercial "hedges," which would also get them off the regulatory hook, Reuters notes.

"This rule is an indefensible defeat for financial reform," Better Markets, a non-profit advocacy group, wrote on its blog on Wednesday. "It is also a poster child for the pernicious effect of industry's army of lobbyists and the influence that the financial industry has at the regulatory agencies."

Americans for Financial Reform, another advocacy group, wrote on Tuesday, in urging the SEC not to raise the trading limit for swaps dealer exceptions:

Under an $8 billion de minimis exemption, a swaps entity could advertise itself as a dealer to the market and conduct 1,600 such transactions a year, without any requirement to register with the either the SEC or the CFTC. Commodity companies able to take advantage of the hedge exemption, or hedge funds and commodity trading desks able to use a possible own book trading exemption, could expand even further without designation.

The regulators argue that an $8 billion limit for swaps dealers will capture all of the too-big-to-fail banks and the bulk of swaps trading in the U.S., and they may yet lower the bar back down to the other arbitrary number floated by the industry, $3 billion.

But Wednesday's failure follows the JOBS Act, pushed by President Obama himself, which will strip away investor protections in the name of addressing an imaginary crisis of small companies being unable to raise money from investors in private or public markets.

Then there was H.R. 3283, a bill that would create a massive loophole to let banks trade derivatives without having to hold extra capital to protect against losses. That bill is still out there waiting to be passed.

Then there is the banking industry's constant, withering assault on the Volcker Rule forbidding banks from taking risky bets with their own money, which banks say is a necessary part of hedging their risks, sort of like the swaps market. As Jesse Eisinger of ProPublica writes today, lobbyists and complicit regulators have managed to so confuse the issue that they have rendered the Volcker Rule meaningless.

What all of these retreats have in common -- and this is not an exhaustive list -- is an industry successfully pleading to the government to loosen some of the fetters placed on them after their past jaw-dropping acts of malfeasance, all in the name of avoiding the hazily defined "costs" such regulations could impose on the economy.

What's lost is that these "costs" are almost certainly not going to be higher than the cost of, say, bailing out the entire banking industry, as we have had to do once before and likely will be asked to do again, at the rate we're going. The costs of regulation might not even be higher than the cost of simply bailing out one insurance company, American International Group, which nearly got itself annihilated by massive positions in the very swaps market regulators are taking a pass on fully regulating now.

 
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