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Derivatives: Largely an insiders' game

Five big banks account for 80% of all the derivatives held by 100 large U.S. companies, a new report says. That could be bad news for those trying to stave off greater regulation.

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By Dwight Cass, breakingviews.com

(breakingviews.com) -- Derivatives are largely an insiders' game. That's one conclusion to be drawn from a new report suggesting that five big banks account for an overwhelming percentage of the total market. That could be bad news for those arguing against tougher regulation of the market.

Fitch Ratings looked at corporate filings for 100 of the most heavily indebted U.S. companies. Together, these accounted for about half of the nearly $600 trillion private derivatives market. Fitch found that JPMorgan (JPM, Fortune 500), Bank of America (BAC, Fortune 500), Goldman Sachs (GS, Fortune 500), Citigroup (C, Fortune 500) and Morgan Stanley (MS, Fortune 500) hold about 80% of the sample companies' total derivatives exposure.

That doesn't exactly jibe with the argument of lobbyists seeking to stave off regulation. They say derivatives are crucial to corporate America's health, and that the instruments are important because they allow treasurers to hedge various exposures -- to commodity prices, interest rates and even their business partners' future prospects, for example.

To be sure, 57 of the non-financial companies that Fitch examined used derivatives, generally to hedge interest rate risks, according to the report. But the scale of their exposures is dwarfed by that of the five banks. And 17 financial institutions in the sample account for all of the credit derivatives business -- the non-financial companies didn't use them at all.

The big five banks are the most active derivatives dealers, so they must maintain inventories to do business with clients and hedge their exposures. And banks often use derivatives to take proprietary positions. Nonetheless, the report's results imply that a sizeable chunk of the market consists of business done among these five firms themselves.

That could worsen the already acute perception on Capitol Hill that Wall Street's wares are not all that important to the health of the broader economy. Enthusiasm is already running high for legislation to rein in the unlisted derivatives market. This latest report could add fuel to that fire. To top of page

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