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June 24, 2013

Risky derivatives trading comes roaring back

The exotic financial products that nearly crippled the economy in 2008 are roaring back at the nation’s biggest banks, according to data released Friday that reform advocates worry come just as regulations to rein in risky trading are being weakened in Washington.

Demand for derivatives — contracts whose value is derived from stocks, bonds, loans and currencies — is growing as investors and corporations try to lock in low interest rates. But critics worry that there are too few rules to protect taxpayers from a market dominated by a handful of banks.

On Friday, the Office of the Comptroller of the Currency reported that banks pulled in $7.5 billion in revenue from trading derivatives in the first three months of 2013, a 7 percent increase from the corresponding period a year ago, and a 72 percent jump from the fourth quarter of 2012. The face value of the derivatives held by banks rose 4 percent over the prior year to $231.6 trillion, according to the report.

“’The improvement in the U.S. economy and low interest rates led to significant capital-raising activity in the bond markets,’ said Kurt Wilhelm, director of the OCC’s Financial Markets Group. ‘That led to strong client demand for risk-management products as investors increased their hedging and positioning against potential changes in monetary policy.’”

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Read full Washington Post article here

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