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March 1, 2013

CFTC Derivatives Proposal Would Weaken Rules Meant To Prevent Another Crisis, Advocates Warn

The federal regulator overseeing trading in derivatives — an opaque realm worth hundreds of trillions of dollars at the center of the global financial crisis — is moving to loosen proposed new restrictions, rendering the markets vulnerable to fresh instability, said advocates for greater scrutiny.

A proposal that would allow continued private trading of derivatives with less transparency for market participants is being pressed by at least three commissioners on the five-member Commodities and Futures Trading Commission — two Republicans and one Democrat — according to sources familiar with the deliberations. The body’s chairman, Democrat Gary Gensler, opposes the measure, these sources said.

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The Dodd-Frank financial reforms adopted by Congress in 2010 were aimed at preventing a replay of that scenario. The law tasked the CFTC with creating a new marketplace in which banks would trade derivatives openly, with their positions disclosed to the public.

Previously, trading had occurred mainly over the telephone, in private deals between large players. Congress mandated that most of the trading should be restricted to a central computerized market, a “central limit order book” in industry jargon.

But a key exception granted traders of very exotic or large derivative positions the right to exchange their wares privately. Critics said that would reduce transparency and benefit the biggest banks that dominate the field.

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“Dennis Kelleher, an advocate for financial reform who leads a Washington-based non-profit Better Markets, argued that the real motive of the change is to enable Wall Street to continue its profitable, but reckless, gambling on derivatives.

““As we said to Commissioner Wetjen and other commissioners in recent meetings, gutting the … rules will only help Wall Street’s biggest banks continue to control the marketplace and will defeat the purposes of financial reform,” Kelleher said in a written statement. “The law was passed because Wall Street caused the biggest financial collapse since the Great Crash of 1929 and has inflicted the worst economy on the U.S. since the Great Depression. Financial reform is supposed to prevent that from happening again. The CFTC must stand up to Wall Street, reject self-serving, profit-maximizing arguments, and protect the American people.””

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Read full Huffington Post article here

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