Wednesday, April 18, 2012

Exempting Energy Companies, Hedge Funds, and Banks From Oversight

Regulators to Ease a Rule on Derivatives Dealers. The New York Times. By BEN PROTESS. Feb 17, 2012.

[excerpted] "As federal regulators put the finishing touches on an overhaul of the $700 trillion derivatives market, a major provision has been tempered in the face of industry pressure.

On Wednesday, the Securities and Exchange Commission and the Commodity Futures Trading Commission are expected to approve a rule that would exempt broad swaths of energy companies, hedge funds and banks from oversight. Firms would not face scrutiny if they annually arrange less than $8 billion worth of swaps, the derivative contracts tied to interest rates and commodities like oil and gas.

The threshold is a not-insignificant sum. By one limited set of regulatory data, 85 percent of companies would not be subject to oversight...

Under the rule, companies can exclude the swaps they use to hedge their business against risk like, say, interest rate fluctuations. And the rule would apply only to a company’s swaps transactions, so firms would not need to count their other varieties of derivatives, like forwards and options. The Commodity Futures Trading Commission also scrapped a strict provision that would have prevented companies that are exempt from the rules from arranging more than 20 swap contracts in one year, regardless of the dollar amount.

As a result, some large banks and other players are expected to avoid regulatory scrutiny in swaps, based on data from the Office of the Comptroller of the Currency."

[end quote]

MAJIA HERE: After reading about the loopholes that would scuttle derivatives regulation in the energy market, among other markets, read this article here:

Speculation in the Oil Markets... 40 Percent "Tax": The High Cost of Gambling on Oil By JOSEPH P. KENNEDY II Published: April 10, 2012. The New York Times.
[excerpted] "...there are factors contributing to the high price of oil that we can do something about. Chief among them is the effect of “pure” speculators — investors who buy and sell oil futures but never take physical possession of actual barrels of oil. These middlemen add little value and lots of cost as they bid up the price of oil in pursuit of financial gain. They should be banned from the world’s commodity exchanges, which could drive down the price of oil by as much as 40 percent and the price of gasoline by as much as $1 a gallon...."

Majia here: Derivatives must be strictly regulated. Derivatives shift wealth from the many to the few. Derivatives trading allows financial firms to manipulate markets and even sabotage countries. Derivatives are a tool of the elite and are used against the many.

In late 2010 I attempted to verify the amount of outstanding derivatives with the Bank of International Settlements’ data for 2009, published in the June 2010 Quarterly Review (pp. 121-126 

I totaled the numbers provided in the BIS tables for derivatives to $5626883 in billions. 

Wayne Madsen uses data from the U.S. Federal Reserve Bank to put the total outstanding derivatives value in the quadrillions (2010, and notes that “DK Matai of the Asymmetric Threats Contingency Alliance notes that a conservative 10 percent default or decline could result in $100 trillion of payouts.” 

Although these numbers are simply unintelligible, it is clear that the notional value of derivatives outstanding exceeds the world’s GDP exponentially. 

I've written about the dangers and extortive properties of derivatives extensively. 

I've published an essay on the topic.
see also

1 comment:

  1. Majia, I enjoy your blog and your persistent exposure of the nuclear industry, thanks.

    On derivatives, can we even afford to have derivatives in a contracting economy? If paper representations are expanding exponentially (see the last part of the essay below) and resources are contracting, what does that mean for the value of money for the little person trying to buy groceries? Shouldn't the question be, can we afford a currency that is mostly represented by debt to the future?


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