SEC aims to shed more light on murky world of derivatives

Introduction

Securities regulators have proposed derivatives market rules that would require big players such as Goldman Sachs Group Inc., JPMorgan Chase & Co., and Morgan Stanley to reveal key information about their deals.

The Securities and Exchange Commission’s five commissioners unanimously agreed to propose a regulation that would give counterparties insight into the material risks, characteristics, incentives and potential conflicts of interest of each deal, reports MarketWatch. The plan “would level the playing field in the security-based swap market by bringing needed transparency to this market and by seeking to ensure that customers in these transactions are treated fairly,” said SEC Chairman Mary Schapiro.

The SEC will collect public comment on its proposal before finalizing the regulation later this year.

The secretive derivatives, or swaps, market was blamed for a large role in the 2008 financial meltdown. Last year, Goldman Sachs paid $550 million to settle the SEC’s civil fraud charges that the bank should have told investors in a collateralized debt obligation (CDO) that a hedge fund had helped build the CDO but was now betting against it.

Winners and losers in swipe fee – The Federal Reserve’s decision to cap debit swipe fees at 21 cents may be a big win for banks, but says little about how financial reform efforts as a whole are succeeding, writes Time columnist Stephen Gandel.

Swipe fee caps did not cause the financial crisis and have “nothing to do with making the banking system any safer, just about punishing the banks,” Gandel writes. The Fed ‘s final rule also allows banks to add five basis points of the value of each transaction to help pay for fraud costs. Although banks now get 44 cents to process each debit transaction, a Fed study found the actual cost to banks was less than a dime.

Prepaid card risks – Amid a surge in prepaid debit and credit cards, the Comptroller of the Currency says U.S. banks must assess the potential money-laundering and fraud risks of offering them, and allow OCC staff to examine any third-party providers of the cards to the banks.

The Federal Reserve, at a Wednesday meeting on debit card fees, said it would be up to the Consumer Financial Protection Bureau to strengthen safeguards for buyers of costly prepaid cards.

Mortgage modifications fall – The number of struggling homeowners able to negotiate a permanent reduction in their loan principal fell by more than 30 percent in the first quarter of 2011. Only 2,906 of permanently modified mortgages cut the amount of principal during the quarter, compared to 4,197 in the fourth quarter, according to the Comptroller of the Currency’s quarterly mortgage report.