- The Washington Times - Thursday, October 15, 2009

A key House panel moved to tighten rules on previously unregulated financial instruments Wednesday, a long-awaited step toward governing the complex transactions at the heart of the troubles that befell some of Wall Street’s most well-known financial houses.

The House Financial Services Committee was poised to adopt a proposal close to the Obama administration’s plan to move most private trading in over-the-counter derivatives to regulated exchanges. Chairman Barney Frank dropped his proposal for an outright ban on trades that regulators judge detrimental to markets.

While many companies use derivatives to protect themselves against market fluctuations, these products have also become a means for financial speculation. They have grown into a $600 trillion global market that regulators say can threaten the entire economy.

Mr. Frank, Massachusetts Democrat, said exemptions would apply to companies that use derivatives for commercial reasons to protect against risk, not those that use it for financial reasons. Companies could lose that exemption if regulators see a pattern of activity that places other participants in the transactions at risk. Exempt or not, companies also would have to report their trades and the prices.

“There will be no more hidden trades where we don’t know the price,” Mr. Frank said.

Regulating derivatives is one of the elements of President Obama’s proposal for correcting the practices of banks, investment houses and other financial institutions that contributed to last year’s economic collapse. Mr. Obama also wants a new Consumer Financial Protection Agency to police mortgages, credit cards and other consumer products offered by banks and other financial institutions, a proposal opposed by banks and business groups.

Mr. Frank intends to have his committee adopt those measures by the end of the week. House Majority Leader Steny H. Hoyer, Maryland Democrat, said Wednesday that he would expect the legislation to reach the House floor for a vote in three to four weeks. The Senate has yet to act on the Obama proposals.

Republicans said derivative transactions should be disclosed and operate under great visibility but object to trading them in regulated exchanges.

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