More Delay on Derivatives

Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.


The big omission in Sen. Chris Dodd’s long-awaited financial reform bill today is any substantive update on new regulation of derivatives, those tricky, opaque financial products that have caused such immense headaches. Derivatives, in a nutshell, are contracts whose value goes up or down based the price of an underlying entity, like a stock, bond, certain form of currency, or commodity (corn, oil, etc.). Right now, most derivatives are traded “over-the-counter,” which means the trade takes place between a customer and a broker-dealer, and there’s little to no information published about trading, so hundreds of billions of dollars in derivatives trades essentially take place in the dark.

What lawmakers and reforms want to do is move most of those trades onto a clearinghouse or exchange like the New York Stock Exchange. That would shed some light on who’s trading with whom, how much the buyer bought, and how much the buyer paid. Sounds fair, right? The House’s financial reform bill called for moving OTC derivatives trading onto exchanges, and Dodd’s initial framework for financial reform released in November called for the same. However, negotiations between Sens. Jack Reed (D-RI) and Judd Gregg (R-NH), the two lawmakers tasked with crafting the Senate banking committee’s derivatives overhaul, have yet to result in any new breakthrough, and the derivatives language in Dodd’s plan announced today offers no new updates on where those negotiations might be headed.

Going forward, the key aspect of derivatives reform to watch is whether some senator throws in what’s called an end-user loophole. End users are the companies—airline companies, utilities—who use derivatives for legitimate purposes, like hedging the price of oil so that if oil costs go up or down, those companies can plan on a consistent price level. It’s basic risk management. Some lawmakers want to exempt these endusers because they’re not using derivatives for speculative, gambling purposes. The problem is, an enduser loophole would ultimately exempt two-thirds of OTC derivatives trades—and a number of those exempted would trades by gambling banks, letting the people who need to be regulated slip by. It would be the exception that ate the rule, and it’s a crucial part of the bill. How Sens. Reed and Gregg deal with it will be a telling sign of how serious they are about reining in these troublesome trades.

WE'LL BE BLUNT:

We need to start raising significantly more in donations from our online community of readers, especially from those who read Mother Jones regularly but have never decided to pitch in because you figured others always will. We also need long-time and new donors, everyone, to keep showing up for us.

In "It's Not a Crisis. This Is the New Normal," we explain, as matter-of-factly as we can, what exactly our finances look like, how brutal it is to sustain quality journalism right now, what makes Mother Jones different than most of the news out there, and why support from readers is the only thing that keeps us going. Despite the challenges, we're optimistic we can increase the share of online readers who decide to donate—starting with hitting an ambitious $300,000 goal in just three weeks to make sure we can finish our fiscal year break-even in the coming months.

Please learn more about how Mother Jones works and our 47-year history of doing nonprofit journalism that you don't find elsewhere—and help us do it with a donation if you can. We've already cut expenses and hitting our online goal is critical right now.

payment methods

WE'LL BE BLUNT

We need to start raising significantly more in donations from our online community of readers, especially from those who read Mother Jones regularly but have never decided to pitch in because you figured others always will. We also need long-time and new donors, everyone, to keep showing up for us.

In "It's Not a Crisis. This Is the New Normal," we explain, as matter-of-factly as we can, what exactly our finances look like, how brutal it is to sustain quality journalism right now, what makes Mother Jones different than most of the news out there, and why support from readers is the only thing that keeps us going. Despite the challenges, we're optimistic we can increase the share of online readers who decide to donate—starting with hitting an ambitious $300,000 goal in just three weeks to make sure we can finish our fiscal year break-even in the coming months.

Please learn more about how Mother Jones works and our 47-year history of doing nonprofit journalism that you don't find elsewhere—and help us do it with a donation if you can. We've already cut expenses and hitting our online goal is critical right now.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate