Since nobody wants to step up to the plate, my thinking is this might point to why ABX decided to do this now (my emphasis):
bloomberg.com
JPMorgan, Hedge Funds May Lose as Derivatives Proposal Advances
By Dawn Kopecki
Aug. 12 (Bloomberg) -- President Barack Obama sent Congress his plan to rein in the $592 trillion over-the-counter derivatives industry, a measure that would cut into a profitable market for banks led by Goldman Sachs Group Inc. and JPMorgan Chase & Co.
The proposal issued yesterday would pressure derivatives users such as banks and hedge funds to move away from opaque customized contracts by imposing higher capital and margin requirements on the instruments. Standardized derivatives would be moved to regulated exchanges or trading platforms and sent through official clearinghouses, according to the draft measure.
“The big broker dealers make a lot of money trading these customized derivatives,” said Paul Miller, a banking analyst for FBR Capital Markets in Arlington, Virginia.
Custom derivatives are more profitable than contracts traded over an exchange, so the dealers will work to get the legislation “watered down,” Miller said. The derivatives proposal is part of a broader overhaul of financial industry rules meant to prevent a repeat of last year, when the collapse of Lehman Brothers Holdings Inc. and American International Group Inc. froze credit markets.
“These markets have largely gone unregulated since their inception,” the U.S. Treasury said in a statement yesterday. “Enormous risks built up in these markets -- substantially out of the view or control of regulators -- and these risks contributed to the collapse of major financial firms in the past year and severe stress throughout the financial system.”
Biggest Users
New York-based JPMorgan was the largest derivatives user among U.S. banks as of March 31, with $81.2 trillion in notional contracts, according to the Office of the Comptroller of the Currency. New York-based Goldman Sachs was the second-biggest with $39.9 trillion, followed by Bank of America Corp. with $38.9 trillion and Citibank N.A. with $29.6 trillion.
The draft legislation would require the Securities and Exchange Commission and the Commodity Futures Trading Commission to set capital and margin requirements for non-bank swap dealers and “major swap participants” that are “as strict or stricter” than those set for U.S. depository institutions by federal bank examiners, according to the proposal.
Hedge funds and private equity firms would be among the hardest hit, said Karen Shaw Petrou, a managing partner at research firm Federal Financial Analytics in Washington. Unlike federally insured banks, hedge funds and other corporations aren’t currently subject to capital standards.
“A lot of the big counterparties, like AIG, lack the capital to back their bets,” Petrou said.
‘Back Your Debts’
“Hedge funds and private equity players would be the ones for which the capital requirement would be the highest reach,” she said. “It makes it hard to be a trader when you have to put up capital to back your debts.”
Derivatives are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. Credit-default swaps are derivatives created primarily to protect lenders and bondholders from company defaults.
The Obama legislation sent to Capitol Hill yesterday mirrors the administration’s preliminary proposals by asking Congress to impose higher capital and margin requirements, move most derivatives to regulated exchanges and clearinghouses and impose supervision over all dealers. The legislation also aims to “better protect” small municipalities and “unsophisticated investors” by limiting their eligibility to trade derivatives.
The Justice Department is investigating at least seven former JPMorgan bankers for possible violations for selling unregulated derivatives to local governments, according to Financial Industry Regulatory Authority records. Former bankers from Wachovia Corp. and Bear Stearns Cos. are also under investigation, according to filings with Finra, the largest self-regulator for securities firms doing business in the U.S.
Frank’s Support
House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, told reporters last month he supports proposals to restrict derivatives sales to municipalities.
Banks that are derivatives dealers and major market participants would be regulated by federal banking agencies, while non-bank investors would be regulated by the SEC and the CFTC, according to the Treasury statement. The industry would be subject to greater disclosure requirements, giving regulators confidential access to data on transactions and open positions and giving the public aggregate data and trading volumes.
“What’s really starting to hit home is how bifurcated the regulatory environment’s going to be for the OTC swap market,” said Kevin McPartland, a senior analyst in New York at TABB Group, a financial-market research and advisory firm. The dual regulators will create “a reporting registration nightmare,” he said.
‘Complicated and Costly’
“Operationally and legally, at least for a few years, it seems like it’s going to be complicated and costly,” he said.
Congress, which is scheduled to return from recess on Sept. 8, must reconcile the Obama administration’s ideas with other legislative proposals already under consideration.
Frank and House Agriculture Committee Chairman Collin Peterson, a Minnesota Democrat, have already embraced many of Obama’s plans for derivatives markets, according to a three-page proposal they released last month. Lawmakers still need to decide how to split oversight and enforcement between the SEC and CFTC.
Opaque financial products, including some derivatives, contributed to almost $1.6 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg.
To contact the reporters on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.
Last Updated: August 12, 2009 00:00 EDT |
