Under pressure from Wall Street lobbyists, federal regulators have agreed to soften a rule intended to rein in the banking industry’s domination of the derivatives market, the New York Times DealBook blog reported yesterday. The changes to the rule to be announced today could effectively empower a few big banks to continue controlling the derivatives market, a main culprit in the financial crisis. The $700 trillion market for derivatives has operated in the shadows of Wall Street rather than in the light of public exchanges. Just five banks hold more than 90 percent of all derivatives contracts. Yet allowing such a large and important market to operate as a private club came under fire in 2008. Derivatives contracts pushed the insurance giant American International Group to the brink of collapse before it was rescued by the government. In the aftermath of the crisis, regulators initially planned to force asset managers like Vanguard and Pimco to contact at least five banks when seeking a price for a derivatives contract, a requirement intended to bolster competition among the banks. Now, according to officials briefed on the matter, the Commodity Futures Trading Commission has agreed to lower the standard to two banks. About 15 months from now, the officials said, the standard will automatically rise to three banks. And under the trading commission’s new rule, wide swaths of derivatives trading must shift from privately negotiated deals to regulated trading platforms that resemble exchanges.
