The Obama administration will detail this afternoon its plan to regulate the exotic financial contracts that helped fuel the global crisis and crippled some of the biggest names on Wall Street, such as American International Group, sources familiar with the matter said, acording to The Washington Post.
The proposal, which will require congressional action, imposes a number of restrictions on the so-called dark markets that trade a broad range of these instruments, known as derivatives, without government oversight.
An announcement is scheduled for 4 p.m. The heads of the Treasury Department, Securities and Exchange Commission and Commodity Futures Trading Commission are likely to jointly unveil the proposal.
The administration is seeking to amend securities law so that most derivatives would have to be traded through central clearinghouses regulated by the SEC and the CFTC.
In turn, the clearinghouses would require traders to maintain enough money in reserve so they could cover losses in any investments gone bad. These so-called margin requirements have been a hotly debated issue between the government and private traders because it curbs their profits.
The two government agencies would also impose record-keeping and reporting requirements for the traders, ensuring a paper trail for their activities.
In addition, the government is seeking to increase the powers of the market regulators to clamp down on fraud. The government would also have greater authority to prevent anyone from cornering a market, especially in commodity trading where a few investors can have an outsized effect on the price of a critical good such as natural gas or cotton.
Some derivative contracts would still be traded outside of the clearinghouses under the administration's plan. But such trades much be reported to the clearinghouses so that all investors could get a full view of the market activity.
Lack of information about derivatives raised grave concerns last fall as the crisis threatened to topple the financial system. Because regulators did not know precisely how many firms and investors were trading derivatives, officials struggled to understand how the crisis was spreading.
In the late 1990s, some government officials proposed regulating this market. But top economic officials inside the Clinton Administration were concerned about undermining financial innovations and rejected the suggestion.
The market for derivatives has since ballooned in the tens of trillions of dollars, outpacing the growth of the traditional stock and bond markets.
Suspicious have grown about whether traders have been able to use derivatives to manipulate the market. While the SEC has oversight over most kinds of securities and the CFTC has oversight over most kinds of commodities, many derivatives have escaped regulatory scrutiny.
Several companies have already received approval from regulators to set up clearinghouses. The derivatives industry, aware of looming regulation, has been pushing derivatives firms to move their contracts onto clearinghouse platforms.
Some analysts recently have been warn of loopholes in the administration's plan, which officials have hinted at in recent months. The proposal would allow a limited number of highly specialized derivatives to trade without going through a clearinghouse. Some analysts warn that this exception might lead derivatives traders to create increasingly complex derivatives to avoid regulation.
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