Federal regulators have softened a new regulation intended to make the derivatives market—which helped cause the financial crisis—more competitive among banks. A derivative is a contract whose value is based on other underlying assets, such as stocks, bonds, commodities, currencies, interest rates and market indexes.

Currently, just five banks control 90% of all derivatives contracts: JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley and Goldman Sachs. The Commodity Futures Trading Commission (CFTC) had planned to require firms wanting a price for a derivatives contract to contact at least five banks.

But after lobbying from financial institutions, the CFTC lowered the requirement to two banks. CFTC officials claim the standard will increase to three banks in about 15 months.

The $700 trillion derivatives market allows companies to essentially gamble on deals made on Wall Street. Such activity nearly destroyed insurance giant American International Group before the federal government rescued it.

-Noel Brinkerhoff

To Learn More:

Big Banks Get Break in Rules to Limit Risks (by Ben Protess, New York Times)

Obama Administration Exempts 85% of Energy Derivatives Traders from Regulation (by David Wallechinsky and Noel Brinkerhoff, AllGov)

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