Companies Push For Derivatives Exemption

But Gary Gensler, chairman of the Commodity Futures Trading Commission, told the panel that if Congress decides to exempt some end-user transactions, the exception should be "explicit and narrow."

Broader exemptions could allow financial market players such as hedge funds, for example, to benefit from them, Gensler says.

The value of derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.

Companies of all kinds use derivatives to hedge against risks — airlines ensuring against spikes in fuel prices, for example. At the same time, derivatives have become a growing vehicle for financial speculation and ballooned into a sprawling $600 trillion market. Regulators say they pose a threat to the stability of the financial system.

Credit default swaps, a form of insurance against loan defaults, account for an estimated $60 trillion of the derivatives market. The collapse of the swaps brought the downfall of Wall Street banking house Lehman Brothers Holdings Inc. and nearly toppled American International Group Inc. last year.

The subsequent $180 billion taxpayer bailout of the insurance conglomerate damaged manufacturers and the economy. Tough new oversight of an unregulated global derivatives market is needed to prevent another crisis, Gensler said.

Sen. Blanche Lincoln, D-Ark., the Agriculture Committee chairman, may draft a bill to regulate derivatives. At the same time, Senate Banking Committee Chairman Christopher Dodd, D-Conn., has proposed a derivatives measure with exemptions for end users that are narrower than those in the House legislation.

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