Bill Requires Derivatives to Be Traded on Centralized Exchanges

Posted Apr 14th 2010 12:40PM by Connie Madon
Filed under: Insiders, Market Matters, Politics

The issue of regulating derivatives trading has been festering since last year. The banking industry's lobbying to bury the legislation has been fierce.

So far, derivatives trades, including credit default swaps (CDSs) and collateralized debt obligations (CDOs), have been kept secret between parties. Proposals to make this information public are creating a warlike atmosphere between lobbyists and Congress.

Thankfully, Blanche Lincoln, chair of the Senate Agricultural Committee, introduced a bill that would require derivatives trading to occur on centralized exchanges. Lincoln wrote: "Speculators will not be exempted and all trades will be reported to regulators and the public."

Trading would be conducted in a similar way that commodity trading is done on major exchanges such as the Chicago Mercantile Exchange (CME).

Financial institutions are fiercely opposing this legislation because they no longer could trade in their usual cloak-and-dagger mode. At present, if you want to buy or sell certain derivatives, you must go to a few select banks or market makers. They create bids and offers based on how much the traffic will bear. With public trading, market makers would have no place to hide. They would be required to post their bids and offers on the exchange platform. This is the way commodity markets have operated for several decades.

Do you believe that derivatives trading should be regulated?

Tags: Blanche Lincoln, derivatives, inthenews

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Reader Comments (Page 1 of 1)

4-15-2010 @ 7:18AM

Dan Barnett said...

What ever happened to the Auction Based Securities of a few years ago? I seem to remember the same argument being made about the "market setting the price" and then the whole thing falling apart when there were no buyers. Unless and until there is complete, clear, accurate, and public information about the contents of the derivatives; the whole thing is still a crap shoot.