Opponents of Derivatives Regulation, Redux

Derivatives — traded contracts whose price is derived from something else, like a stock, commodity, or interest rate — are the biggest remaining battleground in the financial regulations bill due for a Senate vote by the end of the month. Off the Hill, the loudest objections to a plan crafted by Sen. Blanche Lincoln (D-Ark.) to trade them on exchanges comes from two sides. Here’s a distillation of who doesn’t like it.

**Dealers: **The five biggest derivatives dealers — all big financial firms, like Goldman Sachs — made a whopping $28 billion in fees off of derivatives trading last year. These firms weren’t making bets, but were processing over-the-counter (that is, not exchange-traded) derivatives for their clients. Under regulations proposed by Lincoln and due to be unveiled later today, not only would dealers see those fees go down — they would be forced to wall off derivatives operations from the rest of their businesses.

End Users: End users are non-financial firms that buy derivatives contracts. (For instance, if you were a shipping company, you might want to purchase an option to buy gasoline at a set price in the future, if you thought petroleum prices were on the rise.) Under the Senate bill, companies using derivatives to speculate need to put up collateral. But end users using certain kinds of derivatives to hedge do not. Non-financial firms are concerned that the regulations will be too restrictive — possibly out of concern that financial companies will squeeze through the end user loophole – and they will end up posting collateral, increasing the cost of derivatives.

It is understandable that financial firms do not want to see their derivatives-trading profits disappear — but there is no way legislators will leave this multitrillion-dollar market unregulated just because lucrative companies do not want to see the end of one easy profit stream. (Besides, big Wall Street banks invest in derivatives exchanges and stand to profit from them.) And Lincoln, Sen. Chris Dodd (D-Conn.) and other negotiators do not seem likely to change the end user language.