Big Business gets a break on financial reform

Mary Schapiro, head of the Securities and Exchange Commission, and Gary Gensler, head of the Commodity Futures Trading Commission, agree to limit the impact of swaps rules.

WASHINGTON (CNNMoney) -- Big business scored a major win Wednesday when two regulatory boards agreed to limit the impact of tough rules to regulate the complex trades that helped spur the 2008 financial crisis.

Regulators have been struggling for months to figure out who should be included in a new crackdown of swaps or derivatives -- complex financial bets derived from other financial products such as the price of jet fuel or mortgages.

Derivatives were the key reason that American taxpayers were on the hook for the American International Group (AIG, Fortune 500) bailout in 2008. Derivatives also threatened to take down the global financial system when Lehman Brothers collapsed.

When Congress passed Wall Street reforms in 2010, lawmakers left the big decisions of how to regulate derivatives up to supervising agencies. Generally, the Democratic-controlled Congress wanted swaps to be more transparent and safer.

The two regulatory bodies in charge of derivatives, the Securities and Exchange Commission and the Commodity Futures Trading Commission, originally suggested that the new rules should target those who trade more than $100 million worth of swaps a year.

But over the past two years, big business, ranging from Wall Street to energy and agricultural companies, have spent millions of dollars lobbying regulators. They wanted the regulators to back off on tougher rules that would require disclosure of the price of a swap as well as capital to back up those bets.

Opponents of tougher rules argued the crackdown would prevent their ability to make bets to hedge against price volatility. Tougher rules also hike the cost of making all financial bets, while shrinking profit margins.

On Wednesday, the CFTC and SEC voted to sharply narrow the pool of companies that must abide by tougher rules. The rule narrowed the definition of who qualifies as a swaps dealer by raising the threshold from a suggested $100 million to $8 billion in swaps traded each year.

In three years, the threshold would broaden and impact those that trade $3 billion in swaps per year.

CFTC officials couldn't say Wednesday how many companies would have to register as swaps dealers when the new rules kick in.

Several veterans of the financial crisis cried foul, calling the new rules far too narrow to have much of an impact. One former CFTC official called the move one of the largest erosions of the Wall Street reforms passed as part of the 2010 Dodd-Frank Act.

"It's just breathtaking. How did they get from $100 million to $8 billion? And there are so many exemptions written in there," said Michael Greenberger, a professor at the University of Maryland School of Law who worked at the CFTC during the administration of President Bill Clinton. "It's an administrative veto of Dodd-Frank."

Most financial experts say the largest Wall Street banks would have to abide by the new rules. That includes Bank of America Corp (BAC, Fortune 500)., Citigroup Inc (C, Fortune 500)., Goldman Sachs Group Inc., (GS, Fortune 500) J.P. Morgan Chase & Co. (JPM, Fortune 500) and Morgan Stanley. (MS, Fortune 500)

The rules won't go into effect until Jan. 1 at the earliest, and not until regulators finish other rules, such as what qualifies as a swap.

Many companies and Wall Street banks use derivatives to cut the risk that they'll lose money on a deal. Derivatives are also used to lock in the price of a commodity, the way farmers do with the corn they hope to sell after the harvest.

So called end-users were protected from the new rules and won't be required to abide by tougher rules, officials said.

Derivatives played a role in the financial crisis when bets made on the mortgage market failed, in part because many people assumed housing prices -- which surged in the mid-2000s -- would rise indefinitely.

Those bets were made in the shadows, with no public exposure. So when the housing market crumbled and financial firms started failing, nobody knew the value of these bets, exacerbating the crisis.