by Kenneth Sawhill

Created on: May 18, 2009   Last Updated: May 22, 2009

The federal government has recently put forth new regulatory proposals that would provide much needed oversight and monitoring of the derivatives trading market. According to Timothy F. Geithner, U.S. Treasury Secretary, in a letter to Senator Harry Reid, there are four major objectives to be achieved by these reform measures, including " (1) preventing activities in those markets from posing risk to the financial system; (2) promoting the efficiency and transparency of those markets; (3) preventing market manipulation, fraud, and other market abuses; and (4) ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties." (Department of the Treasury, 2009)

These new proposals are due in part to the disastrous financial fallout and subsequent effect on the economy caused by irresponsible trading practices in these types of financial instruments by such companies as insurance giant American International Group Inc. (AIG). The proposals, if enacted, may prove to be very beneficial to such companies as CME Group Inc. (CME), and Intercontinental Exchange, Inc. (ICE), both of which are leading companies in clearing OTC contracts, CME being the parent company of the Chicago Board of Trade and the Chicago Mercantile Exchange.

Both CME and ICE are futures exchange operators, and one of the primary services they provide in this capacity is to monitor the risk management practices of companies involved in the derivatives trading market. The new regulations could provide significant additional business revenues for both of these companies. The new proposals would potentially increase the volume of new derivative contracts requiring monitoring, and also increase the volume of contracts that would require administrative oversight and clearance. The responsibility and means to clear these contracts and guarantee trades would fall to such clearing firms as CME and ICE. In addition, if the proposals are adopted, "third party" clearing might be put in place for all OTC derivative contracts, and this would provide the potential for further increase in business revenues. Both CME and ICE are positioned to benefit significantly from the new fed proposals, if enacted.

Other companies that may benefit from the proposed federal reforms include Citadel Investment Group, which partnered with CME in order to create an electronic-trading platform for credit-default derivatives. Additional derivative clearing houses that may be in competition

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