Wall Street dodges bullet on derivatives

By David Ellis, staff writer


NEW YORK (CNNMoney.com) -- It's a brave new world for the derivatives market. Or is it?

Congress' efforts to reshape this murky corner of the nation's financial system may have little impact on the Wall Street firms that dabble in these complex financial investments.

As part of the financial regulatory reform bill hammered out early Friday, financial firms will still be allowed to hold onto those businesses that engage in buying and selling less risky derivatives products like foreign exchange and interest rate swaps.

Only riskier products, including the kind of credit default swaps that helped sink insurance giant AIG as well as certain commodity derivatives, and those traded by agriculture companies and airlines to mitigate risk, would have to be spun off into other businesses.

"You don't say 'Boy, not being able to do agricultural swaps is going to impair JPMorgan's core business,' " said Benjamin Grimes, a securities analyst at the Westborough, Mass.-based wealth management firm Grimes and Company Inc.

Those types of derivatives tend to make up a far smaller part of their derivatives business. At Goldman Sachs (GS, Fortune 500), for example, the lion's share of derivatives contracts are for interest rate swaps, or investment products that are bought and sold by businesses to hedge themselves against a change in the direction of interest rates.

Investors seemed unfazed by the bill Friday. Shares of Goldman Sachs, Morgan Stanley (MS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) each gained nearly 2% in midday trading.

But there still could be an impact on the derivatives operations of banks. As part of the proposed bill, financial firms would be required to put many of these derivatives onto clearinghouses and exchanges. Banks have resisted the idea since greater transparency would ultimately mean lower profits for them.

"It may make it less attractive to hedge risk," said Robert Park, president and CEO of Fincad, a Vancouver-based software firm which develops derivatives pricing models. "That is regrettable."

Financial trade organizations frowned on the new rules as well. The American Bankers Association said it remained "strongly opposed" to the legislation, in a statement issued Friday.

The Securities Industry and Financial Markets Association, which represents the interests of hundreds of financial services firms, called the bill "tough", adding it would have "profound effects" on both financial services companies and financial markets. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 17,122.01 15.31 0.09%
Nasdaq 4,569.62 -1.02 -0.02%
S&P 500 2,000.12 0.10 0.00%
Treasuries 2.36 -0.03 -1.25%
Data as of 11:15pm ET
Company Price Change % Change
Bank of America Corp... 16.20 -0.13 -0.80%
Apple Inc 102.13 1.24 1.23%
Facebook Inc 74.63 -1.33 -1.75%
Yahoo! Inc 38.18 0.39 1.03%
Pfizer Inc 29.49 0.28 0.96%
Data as of 4:02pm ET

Sections

Staggering interest from the Chinese in an immigration program has led the U.S. to run out of available visas for the first time ever. More

Former Fed chief Ben Bernanke believes the 2008 financial crisis was the worst in global history, topping even the Great Depression. More

Snapchat has gotten a $20 million funding round from Kleiner Perkins, valuing the company at $10 billion, according to the Wall Street Journal. More

Utah State professor Michael Glauser cycled 4,000 miles this summer, visiting 100 entrepreneurs across the country. Here's a snapshot of how they grew their businesses. More

Five CNNMoney readers share stories about saving that you can learn from: What they would do differently if they had another chance. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.