Are Big Banks Gaming the Dodd-Frank Financial Reform Law?

The New York Times Editorials, Thursday, July 3, 2014

Another Failure to Regulate Derivatives

“By the time the Securities and Exchange Commission finalized a rule last month to regulate derivatives under the Dodd-Frank financial reform law, the big banks that dominate the multitrillion-dollar market had already figured out how to game it…

The aim of the Dodd-Frank law is to prevent gambling in derivatives, financial contracts that are supposed to manage risk, but that have long been misused for catastrophically excessive speculation…

Under the S.E.C. rule, derivatives regulations will apply to foreign affiliates of American banks only if the affiliates’ derivative contracts are explicitly guaranteed by the American banks, say, by writing a guarantee into a contract…By imposing new rules on guaranteed affiliates only, the S.E.C. has invited the banks to avoid the rules simply by doing away with explicit contracts.

The Dodd-Frank law instructs the S.E.C (Security Exchange Commission) to regulate derivatives; if the agency thinks it lacks the authority to do so it should ask Congress for the power it needs to do its job.  Both the S.E.C. and the C.F.T.C (Commodity Futures Trading Commission) need to greatly expand the reach of their derivatives rules and curb the rush to ‘de-guarantee.’  Until they do, American taxpayers and the financial system will remain exposed to the ravages of unregulated derivatives trading.”

Games: the banks, the S.E.C. and the taxpayers!



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