Regulators Decide At The Last Minute They're Not Going To Regulate The Vast Majority Of Derivatives Traders

Mary SchapiroMary L. Schapiro, the chairwoman of the Securities and Exchange Commission, testified before Congress on Tuesday.

Regulators have been trying to get their act together and set up some sort of regulated derivatives market for the last four years. And now they will, or at least, they say they will, regulate far less of the market than they had originally planned, according to the New York Times.The SEC and the Commodity Futures Trading Commission (CFTC) have now proposed to exempt firms from oversight if they trade less than $8 billion in derivatives contracts annually, which leaves out 85% of the market’s participants. When the rule was originally proposed back in 2010, the threshold was far lower, at $100 million, which would have excluded 30% of firms.

The rule will be evaluated for a period of 5 years, at which point regulators will decide if the $8 billion exemption threshold is appropriate. At that point, the derivatives market will very likely total well over $1 quadrillion. (Side note: Let that sink in for a minute. I for one, am not looking forward to having to write or say the word “quadrillion” on a regular basis)

It is unclear what the side effects of such a rule would be. The largest, most systemically important banks would still be regulated, and while $8 billion sounds like a large number, the derivatives market is absolutely massive, with over $700 trillion worth of outstanding contracts as of June 2011, according to the Bank for International Settlements.

The (kind of) finalization of the rule marks the end of a year filled with intense back and forth between regulators, derivate trading companies, and advocacy groups, as well as politicians, and of course, the media.

Interestingly, a group of energy companies who happen to also trade a bunch of derivatives, including BP, Constellation Energy and Shell, had proposed raising the threshold to $3.5 billion from the originally proposed $100 million.

Apparently regulators thought that wasn’t high enough.

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