On Wednesday, the Obama administration dramatically scaled back its oversight of financial institutions that deal in the $700 trillion derivatives market.

 

Following the passage of the Dodd-Frank reform law, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) proposed new regulations for any firm trading $100 million or more each year in derivatives tied to interest rates and commodities, including oil and gas.

 

At this level, only 30% of institutions would have been exempted from oversight, according to Ben Protess of The New York Times’ DealBook.

 

Now, though, regulators have set the oversight exemption ceiling at $8 billion worth of swaps each year—which could mean as many as 85% of derivatives traders, such as energy companies, hedge funds and banks, would avoid regulation.

 

It just so happens that $8 billion was the exact threshold first suggested by a group of energy companies to the SEC and the CFTC in February 2011. The energy industry engaged in massive lobbying that included an estimated 100 meetings with regulators.

 

The CFTC approved the revised exemption ceiling by a vote of 4-1 and the SEC did so unanimously. Gary Gensler, chairman of the CFTC, defended the rule, arguing that it will still cover the biggest banks, such as Goldman Sachs, and that $8 billion is actually a tiny figure considering that crude oil trades average $65 billion a day and the average daily swap market is $500 billion a day.

-David Wallechinsky, Noel Brinkerhoff

 

Regulators Defend Derivatives Rule (by Ben Protess, New York Times)

Regulators to Ease a Rule on Derivatives Dealers (by Ben Protess, New York Times)

Federal Futures Regulator May Outsource Regulation to…the Futures Industry (by Noel Brinkerhoff, AllGov)