A handle on derivatives

Washington Post: Financial regulation is back in vogue. The administration has issued recommendations to include clearinghouse requirements for most derivatives; add capital, reporting and margin requirements; and grant more regulatory power to the Commodity Futures Trading Commission and the Securities and Exchange Commission to police the financial industry against fraud. Legislation also would strengthen the rules against selling derivative products to everyday investors who don’t have the financial acumen to fully understand them.

Making sense

These reforms make sense. The result would, we hope, be a more transparent, less leveraged industry, with risk better allocated and fraud better controlled. Though there will be many details against which the derivatives industry will push back — and the lobbying dollars will certainly flow on this one — the chastened sector is resigned to living with more regulation. The Europeans, eager to ramp up global financial regulation, will argue that the United States should go further.

Of course, regulation is no silver bullet, and there is always the risk of regulating for the last crisis rather than the next. There will be concerns that the proposed regulations would stifle profits and the liquidity of financial markets — the same concerns that derailed movements to regulate derivatives a decade ago. Those concerns are valid.