Wednesday, December 15, 2010

Derivatives: secrecy harms markets

The New York Times has a lengthy and important article about how a small number of major US banks have become the dominant players in the derivatives market. While this article doesn't make direct reference to offshore issues (though for the record, many hedge funds operate from tax havens, and the article talks a lot about a clearing house with major offshore links, as Lucy Komisar recently explained) a significant feature of the derivatives market is summed up in the following sentence:
"The secrecy surrounding derivatives trading is a key factor enabling banks to make such large profits."
Indeed. TJN has always argued that market transparency is a public good. Both parties to a contract, buyers and sellers, have the right to all material information. When information isn't available to one party or the other (known in the jargon as asymmetric information) market abuses are likely to follow. The situation described in this article suggests every likelihood that a complex monopoly situation now exists in the derivatives market: which will almost certainly not be in consumer interests.

But it gets worse. The measures recently proposed under the Dodd-Frank Bill propose that derivatives markets are made less opaque by requiring trades to be cleared via clearinghouses. This is where the banks, and their amply-rewarded political allies are kicking back:

“Under the Dodd-Frank financial overhaul, many derivatives will be traded via such clearinghouses. Mr. Gensler wants to lessen banks’ control over these new institutions. But Republican lawmakers, many of whom received large campaign contributions from bankers who want to influence how the derivatives rules are written, say they plan to push back against much of the coming reform. On Thursday, the commission canceled a vote over a proposal to make prices more transparent, raising speculation that Mr. Gensler did not have enough support from his fellow commissioners.”

Twisting and turning at every step, banks are determined to prevent any measure that puts public interest ahead of private profit. As the article makes clear, there are plenty of politicians willing to support them in their goals.

You can read the article here.


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