Defusing the $700 Trillion Time Bomb

Dan Freed TheStreet.com September 23, 2010

NEW YORK (TheStreet) -- Fast and ineffective or too slow to matter?

When times were good, few people seemed to realize that the rules of the road in this opaque market were nothing more than guidelines put forward by the financial industry. When the crisis hit and major players in the market such as AIG(AIG) began to topple, those guidelines proved ineffective and markets seized up as financial institutions around the globe demanded their money back all at once. It was the institutional equivalent of a run on the bank--except that the bank was a $700 trillion global market. Now regulators have new authority to police that market. The Commodity Futures Trading Commission, which had been a regulatory afterthought that made the laissez-faire Securities and Exchange Commission look important by comparison, now has new authorities. Chairman Gary Gensler, despite his Goldman Sachs(GS) credentials, has earned the respect of some longtime opponents of Wall Street. At the same time, Gensler has given comfort to financial industry players that he is a moderate, such as when he indicated at conference held Sept. 16 by the International Swaps and Derivatives Association (ISDA), an industry trade group, that he does not believe that derivatives contracts entered into before enactment of the Dodd-Frank Act should be subject to new margin requirements. Lauren Teigland-Hunt, an attorney who represents financial institutions on derivatives matters and a panelist at the ISDA conference, said she found Gensler's view "encouraging." It is also likely to be encouraging to Buffett, who lobbied unsuccessfully to ensure Dodd-Frank would protect existing trades from being subject to new margin requirements. Teigland-Hunt says the new law is unclear on the issue. What remains to be seen is how successful regulators will be at creating new rules for the massive, complex market. One executive at the ISDA conference who believes the new rules will create a new business opportunity for his company expressed frustration with regulators' slowness. The executive was in Washington for a roundtable earlier in the month, and said regulators questions were "on the most elementary issues," adding "they were asking the same questions three months ago. They need to get moving." 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