Federal regulators have softened a plan to oversee companies that trade financial derivatives, the complex investments that played a central role in the 2008 financial crisis.
The decision defines which companies that trade derivatives will face tougher oversight by regulators. Most companies that deal in derivatives would be exempt.
Stronger regulation of derivatives is a cornerstone of the overhaul of financial rules passed by Congress in 2010. Before the crisis, regulators had little say in how derivatives companies did business. Most of the deals were one-off agreements between banks, hedge funds and other companies.
The Securities and Exchange Commission and Commodity Futures Trading Commission approved the rule unanimously in separate votes Wednesday. The rule says derivatives used by companies to offset their own risk will not come under scrutiny. The higher oversight standard would apply mainly to companies that sell $8 billion or more of the investment products annually.
Over time, the rule would capture more companies, as the threshold for stricter oversight would drop to $3 billion in derivative sales after five years.
Under an earlier proposal companies that sold $100 million of certain derivatives would have faced tougher oversight. They would be subject to standards for how they conduct business, and would have to report more details of their operations to regulators.
By raising the limit to $8 billion, regulators freed many energy companies, hedge funds and banks from the threat of greater oversight. The move followed intense lobbying by industry groups, who said the earlier proposal would indirectly raise prices for consumers.
Groups that advocate stricter oversight of the financial industry condemned the rule, saying regulators had bowed to industry demands and sidestepped Congress' desire to crack down on derivatives.
"This rule is an indefensible retreat from financial reform," said Dennis Kelleher, president and CEO of Better Markets, a group that pushes for stricter limits on financial companies' activities. "It also is a poster child for ... the influence that the financial industry has at the regulatory agencies," Kelleher said in a statement.
Under the rule, regulators still would step up their scrutiny of the big banks that dominate the derivatives market, such as Goldman Sachs and JPMorgan Chase & Co.
CFTC Chairman Gary Gensler defended the rule before his panel voted. The market is dominated by big companies, he said, so "the final swap dealer definition will encompass the vast majority of swap dealing activity, as Congress had intended."
Every day, Gensler noted, companies write $500 billion of a type of derivative used to guard against the risk of changing interest rates. So companies that sell only $32 billion of derivatives a day would be captured within the $8 billion limit, he said.
The move comes a day after President Barack Obama pushed Congress to give the CFTC more power to eliminate price manipulation by energy speculators. Obama has been under attack by Republicans, who blame him for rising gas prices.
Obama wants Congress to strengthen supervision of oil markets, increase penalties for market manipulation and empower regulators to increase the amount of money THAT energy traders are required to put behind their transactions.
"We can't afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick," Obama said at the White House on Tuesday.
Daniel Wagner can be reached at www.twitter.com/wagnerreports.
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