Regulators Overhaul Derivatives Market, but With a Caveat
Yet, in the fine print, the agency also effectively empowered a handful of select banks to continue controlling the $700 trillion derivatives market.
Big Banks Get Break in Rules to Limit Risks (May 15, 2013)
Just five banks hold more than 90 percent of all derivatives contracts, which allow companies to either speculate in the markets or protect against risk. This tight grip came under fire amid concerns that those banks overcharge some companies for derivatives and pose a systemic risk to the economy. Derivatives, for example, pushed the insurer American International Group to the brink of collapse before it was rescued by the government.
In the wake of the crisis, the commission initially planned to require hedge funds, asset managers and other corporations to contact at least five banks when seeking a price for a derivatives contract. The proposed requirement was intended to bolster competition among the banks.
Under pressure from the banks — and some firms that buy derivatives — the agency agreed to lower the requirement to two banks. In about 15 months, the standard will automatically rise to three banks, but the agency agreed to produce a study that could undermine that broader standard.
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