Exempting end-users -- or not
Quick refresher: A derivative end-user is someone -- usually a company -- who uses a derivative hedge against real risks. United Airlines hedging against a sudden spike in the price of oil, for instance. And these folks have been working very, very hard to exempt themselves from the regulations around derivatives.
But reading this piece from the perspective of a derivative end-user is a reminder of at least two reasons to be very careful with those exemptions. First, a lot of large corporations use derivatives to juice profits through, well, trading derivatives. They're not hedging risks so much as running an internal hedge fund. Cargill, for instance, is known for doing this. And if they suddenly have free rein over the unregulated derivatives market, their hedge fund business will get bigger, and riskier. That's not an incentive we necessarily want in the system. It's one thing to have to bail out an investment bank that got into risky trading. It's a whole other level of absurdity to bail out a hamburger producer.
It's also the case that a lot of corporations don't want to bring their derivatives use into the light because it wouldn't look that good. Derivatives can be used to make balance sheets look better, to ease strains before a quarterly report, and generally to do all sorts of other chicanery. That's obviously delicate work, and so those corporations like having a one-on-one relationship with a bank that understands their situation and is used to helping them do what they need to do. That's part of why they're willing to pay the higher fees required for customized derivatives rather than going to a more transparent system where they wouldn't be paying such high fees.
Now, there obviously are many cases where companies user derivatives fully legitimately. But most of what they do can be done on a transparent, standardized market. Which is why I'd still like to see the end-user exemption removed from the bill altogether and replaced with an option to petition the head of the SEC for an exemption, which would limit the exemptions to pretty clear cases where the corporations thought their activities would stand up to scrutiny.
Posted by: srw3 | May 10, 2010 7:03 PM | Report abuse
Posted by: ThePedro | May 10, 2010 8:08 PM | Report abuse
Posted by: rat-raceparent | May 10, 2010 11:31 PM | Report abuse
Posted by: rglvr | May 10, 2010 11:40 PM | Report abuse
Posted by: itkonlyyou52 | May 10, 2010 11:42 PM | Report abuse
Posted by: ostap666 | May 11, 2010 8:28 AM | Report abuse
Posted by: ostap666 | May 11, 2010 8:39 AM | Report abuse
Posted by: raylehmann | May 11, 2010 11:41 AM | Report abuse
The comments to this entry are closed.