Commission weakens rule on derivatives
Board votes to require fewer price quotes on contracts
WASHINGTON – A rule intended to loosen the largest U.S. banks’ control over the trading of complex investments and help safeguard the financial system was weakened Thursday by regulators.
Critics say the changes will allow major Wall Street banks to continue to dominate the $700 trillion derivatives market.
The Commodity Futures Trading Commission approved the rule on a 4-1 vote. Commissioner Jill Sommers cast the lone dissenting vote.
Under the rule, investment firms would be required to request price quotes for a derivatives contract from a minimum of two banks this year and three beginning in 2014. An earlier proposal had called for price quotes from at least five banks.
Derivatives are investments whose value is based on some other investment, such as oil and currencies. The market was largely unregulated before the 2008 financial crisis. The rule was mandated by Congress under the 2010 financial regulatory overhaul.
By requiring fewer price quotes, critics worry that the market will be less competitive. Five of the largest U.S. banks – JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Morgan Stanley – account for more than 90 percent of total derivatives contracts.
Requiring a larger number of quotes gives banks and financial firms that aren’t in the dominant group the opportunity to enter the market and makes it more competitive. That could potentially lower prices for all users of derivatives, such as farmers, airlines or oil companies.
Under the rule, banks and other financial institutions would be required to trade derivatives contracts on new electronic exchanges.
Wall Street banks had opposed requiring a minimum number of bids for derivatives contracts.