WASHINGTON – The largely unregulated market of derivatives, which helped trigger the financial crisis, moved closer to federal oversight as a congressional committee Thursday voted to impose new rules on the products to try to limit the economic risk they can cause.
The 43-26 vote by the House Financial Services Committee was a key step for the Obama administration’s plan to overhaul federal oversight of the financial system while shedding more light on complex investments.
Immediately after the vote, the committee took up the most contentious issue in the regulatory package: creation of the Consumer Financial Protection Agency.
The largely partisan vote on derivatives would bring regulation for the first time to the private, over-the-counter securities, named because their value is derived from the price of an underlying asset, such as interest rates or oil.
But some critics said the new rules aren’t strong enough to prevent future crises, in part because they would exempt too many derivatives deals from transparency requirements. The legislation still faces changes in the House and the Senate, which is under pressure from banks and other businesses to limit the new oversight.
Derivatives were at the heart of the Lehman Brothers failure and the near collapse of American International Group. The government bailed out AIG last fall because so many financial institutions had purchased derivatives known as credit default swaps from the company as insurance to cover potential losses in the housing market and other investments.
In the legislation, dealers, banks and other companies that trade derivatives would have to report and keep records on all transactions and would be required to have set amounts of money in reserve to cover losses.
“We are making substantial changes in the atmosphere in which they operated,” said Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. “There will be no more hidden trades. There will be no more hidden prices.”