ALM Properties, Inc.
Page printed from: International News
Select 'Print' in your browser menu to print this document.
House Passes Bill That Would Exempt Foreign Trades
The Associated Press
The U.S. House of Representatives passed legislation that would exempt the trading of derivatives from federal oversight if it occurs outside the United States.
Supporters say the exemption is necessary to allow U.S. firms to remain competitive in foreign markets. But opponents say the regulations outside the U.S. tend to be weaker and the exemption would put the broader financial system at risk.
Derivatives are investments whose value is based on some other investment, such as oil and currencies. The market was largely unregulated around the globe before the 2008 financial crisis and contributed to the meltdown.
The legislation's prospects in the Senate are uncertain. The White House has signaled it would veto the legislation.
Still, opponents said its passage by the House could pressure regulators to take a more lenient approach in writing rules for oversight of foreign derivatives trading.
Derivatives are often used to protect an investor against future price fluctuations of an underlying commodity or security. But they also are used by financial firms to make speculative bets, and they have grown increasingly complex and risky.
Five of the biggest U.S. banks -- JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Morgan Stanley -- account for more than 90 percent of total derivatives contracts. A large proportion of derivatives are traded outside the U.S., estimated by regulators at around 40 percent to 45 percent of the total.
The Commodity Futures Trading Commission has proposed putting under its supervision all derivatives trading, including trading overseas. But the Securities and Exchange Commission has taken a narrower approach, allowing overseas derivatives trades to escape U.S. regulation if the country in which they occur has a rules system that is roughly equivalent to that of the U.S.
The House bill would require the two agencies to issue a joint rule. And trading in the nine biggest foreign markets for derivatives would be exempt from U.S. regulation.
Opponents pointed to the $182 billion federal bailout of American International Group Inc. at the height of the financial crisis -- the largest for any company. AIG nearly collapsed because of its massive derivatives bets on the housing market. It has since repaid the bailout.
Copyright 2013 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.