Views on improving the integrity of global capital markets
24 November 2010

Banks: “We Will Be Careful”

Posted In: Uncategorized

They are at it once again — banks and other financial firms trying to punch as many holes as possible in the new Dodd-Frank rules relating to oversight of the derivatives market.

Over-the-counter (OTC) derivatives, or customized contracts/arrangements between sophisticated counterparties, were at the core of the systemic meltdown. The main culprits, then, were instruments that bet on mortgages and whether a borrower would default on its credit obligations. In the latest chapter, the banks argue that OTC derivatives that bet on the movement of foreign currencies are straightforward and do not require federal oversight.

Because these currency derivatives were not at the heart of the crisis, banks say that these instruments should be free of federal rules and disclosures. Meanwhile they’re promising not to let their activities get out of whack, too leveraged, or too concentrated this time around. Never mind that it is a $42 TRILLION market. The term “fool us once” comes to mind. The Investors Working Group sponsored by CFA institute was clear on this issue (PDF) — there must be strong regulatory oversight of this systemically critical market.

About the Author(s)
Kurt Schacht, JD, CFA

Kurt Schacht, JD, CFA, is managing director of the Standards and Financial Market Integrity division at CFA Institute, where he oversees all advocacy efforts and the development, maintenance, and promotion of the highest ethical standards of practice for the global investment management industry.

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