Tags: SEC | bank | derivatives | foreign

NYT: SEC Plan Would Expose Investors to Risks of Bank Derivatives

Wednesday, 08 May 2013 07:53 AM

By Michael Kling

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A Securities and Exchange (SEC) proposal would make investors and taxpayers vulnerable to risks of bank derivatives trading, The New York Times warns in an editorial.

Under the SEC proposal, foreign branches of U.S. banks could follow foreign regulations on derivatives trading in countries where the deals are done instead of U.S. rules being formulated under the Dodd-Frank Act. Foreign banks doing derivatives trading with U.S. companies could follow their own country's regulations if they are similar to American rules.

The proposal "could leave investors and taxpayers exposed to the ravages of reckless bank trading," The Times states.

Forbes Columnist:
‘Who the Hell Cleared This?’

The proposal shows that new SEC Chairwoman Mary Jo White "has gotten off on the wrong foot," The Times asserts, calling her actions "a disappointing debut."

Derivatives trading enriches banks when done right, but leads to "shareholder losses and taxpayer-provided bailouts" when they go wrong, according to The Times.

While banks say the SEC plan would avoid duplicative regulations and help foster competition, "in fact, it would enable them to avoid regulation and preserve bank profits," The Times argues.

Regulations on derivatives overseas are weak to nonexistent, the Times asserts. Many derivatives failures involved overseas trade, such as the JPMorgan Chase's "London Whale" debacle and the demise of Long-Term Capital Management in 1998, as well as the 2008 financial crisis.

Plus, the SEC proposal is weaker than is the plan from the Commodity Futures Trading Commission, which regulates the bulk of derivatives trading.

"Disagreement among regulators now gives the banks and their Congressional allies in both parties renewed opportunity to shape final rules to their liking," The Times states.

Importantly, White said at the meeting, the SEC will have flexibility when making decisions, so that it will not be forced into an all-or-none situation. If another country's regulations miss one key element of Dodd-Frank, the SEC could still let market players follow other aspects of that country's regulations.

SEC Commissioner Luis Aguilar takes issue with the proposed rule and calls for the public to submit their comments.

"The proposed rules seem to assume that any failure by these foreign subsidiaries would not financially affect the U.S. parents. However, even without a legal obligation, a U.S. parent company will likely step in to save its financially troubled subsidiaries and protect its reputation," he said at the meeting.

"The proposed rules do not appear to address fully these contagion and spillover risks."

Forbes Columnist: ‘Who the Hell Cleared This?’

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