Who Profits From Derivatives Changes?

Regulation of all of those nasty derivatives that helped caused the fall of Lehman Brothers and hastened the economic decline last year has definitely been on the minds of the Obama administration and Treasury Secretary Tim Geithner.

For months, the administration has been gathering ideas and proposals on how to get control of an almost $600 trillion market traded over the counter, outside of the regulated and monitored exchanges and with very little oversight.

From all indications, Geithner's plans will not be quite as forgiving and "hands off" as his predecessor Hank Paulson's, and the banks seem to be aware of this.

In February, a combined proposal letter from Goldman Sachs (GS Quote), JPMorgan Chase(JPM Quote) and Barclays (BCS Quote) went to Treasury with suggestions about how to shape the forthcoming regulation. That letter surfaced only recently, and the indications are that it was received positively by the Treasury Department. Much of what was in that proposal will be adopted by Treasury.

Buy ICE and CME

In that letter, the banks suggested equal capital requirements for other participants in the derivative markets similar to whatever will be demanded of the banks themselves -- admitting that the "margining" of these instruments have been insufficient in the past.

But this increased burden of capital also brings a benefit to the investment banking community: in essence increasing the barriers of entry to the lucrative OTC markets from outside hedge funds and insurance companies.

And while supporting increased "transparency" of the derivatives markets, the proposal didn't go so far as to suggest that all over-the-counter trading needed counterparty clearing through a regulated exchange like the Chicago Mercantile Exchange(CME Quote) or the Intercontinental Exchange(ICE Quote).

For the $29 trillion dollar credit default swaps market, which was specifically blamed for the Lehman and AIG(AIG Quote) disasters, Treasury has indicated that these instruments will have to be migrated to one of the domestic exchanges and be subject to the rigorous capital, margin and reporting requirements of other publicly traded commodities like gold and oil.