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How To Define Your Terms In 300 Pages


By Theo Francis

Thursday, July 12, 2012

In Tuesday's show, economist Luigi Zingales warned that massive, overly complicated laws and regulations go a long way toward undermining public trust in the government. They leave only lobbyists and lawyers reading the rules, in the pursuit of loopholes.

By coincidence, on Tuesday a key federal financial regulator said it had approved a collection of definitions and conditions for regulating a big chunk of the derivatives market.

It was several hundred pages long.

The derivatives in question are swaps — instruments that let two institutions trade interest rates or currencies, or make bets on a company's or country's ability to repay its debts.

So a bank might promise to pay a client a fixed interest rate on a set amount of money; in return, the client promises to pay the bank a rate that fluctuates with market conditions. If the variable rate stays below the fixed rate, the client wins; otherwise, the bank does.

Under the Dodd-Frank financial-regulation law enacted in July 2010, two agencies share jurisdiction over the derivatives market: the Securities and Exchange Commission, and the Commodity Futures Trading Commission.

Both agencies passed related measures earlier this week, including key definitions for terms like "swap" and "security-based swap agreement." Both agencies trumpeted the progress publicly: Here's the SEC's press release; CFTC Chairman Gary Gensler said in a statement at a commission meeting that the agencies' actions mean "light will begin to shine on the swaps market for the first time."

If you want to take a look at the rules for yourself, you'll have to wait a bit: Each agency's final rule is being prepared for publication in the Federal Register, an exacting process of formatting, proofreading, and, for something this high-profile, maybe also one last check from senior officials. Final versions could take another day or two to appear online.

The agencies told us there were no drafts available online, although they did provide fact-sheets (the CFTC's was 10 pages long) and a Q&A (four-plus pages) about the package. (Initial proposals, which can differ substantially from the final rule, were posted for public comment months ago.) Bloomberg News reports that the full document was 600 pages long; an agency official told Planet Money that about half of that consists of a required cost-benefit analysis.

The SEC passed its version on July 6 in a non-public process that amounted to circulating the document among the agency's commissioners, who voted unanimously in favor. At the CFTC, there was an open meeting on Tuesday, where commissioners voted 4-1. Bart Chilton, a Democratic commissioner and the lone dissenter, said he worried that financial firms could exploit regulatory exemptions in the measure, according to news accounts of the meeting.

That's one of the the risks Zingales raised when he highlighted the sheer size of the full Dodd-Frank law, which weighs in at more than 2,300 pages. By contrast, Zingales said, the law creating the Federal Reserve was just over a dozen pages, proving that even major initiatives can be implemented concisely.

"I want rules that are simple enough that there can be a public debate, and that individuals can pressure their congressman or congresswoman to vote in the way they want, because they have an opinion," he told us.

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