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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

Index Last Change % Change
Dow 17,050.75 138.46 0.82%
Nasdaq 4,810.79 19.64 0.41%
S&P 500 2,013.43 17.60 0.88%
Treasuries 2.11 0.05 2.23%
Data as of 9:37pm ET
Company Price Change % Change
Bank of America Corp... 15.75 0.00 0.00%
EMC Corp 27.18 1.22 4.70%
Apple Inc 109.50 -1.28 -1.16%
Freeport-McMoRan Inc... 13.46 0.45 3.46%
General Electric Co 28.03 0.26 0.94%
Data as of 4:03pm ET


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