Straight Up Derivatives

Treasury Secretary Timothy Geithner called for legislation that would require derivatives to be traded on exchanges or clearinghouses, rather than in over-the-counter (OTC) transactions. This proposed authority over the largely unregulated derivatives multi-trillion-dollar market is aimed at mitigating the systemic risk that contributed to the current global financial crisis. Here are some of the responses to this week’s news.

TheDeal.com identified the stakeholders and explored the politics of derivatives regulation.

The key players here are regulators and payments systems executives around the world, two groups that have long been deeply intertwined and, to the public, mostly invisible. The battlefield has two locales: in Congress and other legislative bodies around the world, but mostly in the arcane and cloistered arena of the standards setters and payments consortia.

NPR pondered the history of options trading and the current battle between Barney Frank and Collin Peterson.

Barney Frank, of course, runs the House Financial Services Committee. He is looking to fundamentally overhaul financial market regulation. We keep hearing that he wants to have ALL financial market regulation under his committee’s umbrella. Which makes some sense: one system, one unified approach. But then there’s Collin Peterson. He runs the Committee on Agriculture. His most famous contribution is the controversial, much loathed and much loved (depending on your zip code) Farm Bill. Peterson wants derivatives to fall under his committee. What do financial derivatives have to do with agriculture? And why are these two Dems fighting?

Wonkette laid out the bare minimum of derivatives regulation.

There are two key things here, things that should not be controversial in any financial market of this magnitude: (1) derivatives must be traded through regulated central clearinghouses, not in SECRET, and (2) some percentage of reserves must be maintained to cover for losses, just in case, for example, “housing prices go down.”

Rick Bookstaber called for simplicity in derivatives.

Complexity is one of the demons that makes our financial markets crisis prone. Much of the complexity arises in the specter of derivatives and other “innovative” products. To reduce the risk of crisis we must exorcise this demon. We need a flight to simplicity. Geithner’s proposal for new derivatives regulations, which includes centralized clearing and exchange trading for standardized derivative products, moves us toward this goal.

Image Credit: epicharmus, Flickr