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Derivatives at Center of Financial Reform

Regulations wanted to require derivatives be traded on exchanges.

Compiled by staff

Published: Apr 16, 2010

The battle over financial regulation is focused on derivatives. Derivatives have been traded on Wall Street for decades, but their popularity exploded over the past decade when big banks discovered they could reap a windfall in fees for their services. Some private research groups estimate that swap dealers have generated up to $40 billion annually in middleman charges. Officials estimate derivatives have a paper value of half-a-quadrillion dollars.

The Senate and House agriculture committees long played a leading role in the oversight of derivatives related to commodities. But the activity expanded well beyond trading in farm products, and most kinds of derivatives today are beyond the reach of regulators. Both the administration and Senate Ag Committee Chairman Blanche Lincoln, D-Ark., want regulations that would result in derivatives traded on exchanges and approved by a clearinghouse that would cover losses in case one party to a derivative contract could not pay up.

An exemption would be given to manufacturers and commercial companies, which often use derivative contracts to guarantee the delivery of a commodity at a set price and time. Still, there is much discontent over exactly how regulations should be formulated. Republicans and industry officials believe Lincoln's proposal would wreak havoc on the financial system and disrupt the economy. The administration, feeling momentum on their side, has encouraged Democratic lawmakers to forge ahead and not concede too much to Republicans or financial industry lobbyists.

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Derivatives at Center of Financial Reform

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