You can now read 10 articles a month for free. Read as much as you want anywhere and anytime for just 99¢.

Regulators weaken bank rules on derivatives

WASHINGTON — A rule intended to loosen the largest US banks’ control over the trading of complex investments and help safeguard the financial system was weakened Thursday by regulators.

Critics say the changes will allow Wall Street banks to continue to dominate the $700 trillion derivatives market.

Continue reading below

The Commodity Futures Trading Commission approved the rule on a vote of 4 to 1. Commissioner Jill Sommers cast the lone dissenting vote.

Under the rule, investment firms must request price quotes for a derivatives contract from only two banks this year and three beginning in 2014. An earlier proposal had called for price quotes from five banks.

Derivatives are investments whose value is based on some other investment, such as oil.

The market was largely unregulated before the 2008 financial crisis. The rule was mandated under the 2010 financial regulatory overhaul.

With fewer price quotes, critics worry that the market will be less competitive. Five of the largest US banks — JPMorgan Chase & Co., Goldman Sachs Group, Bank of America Corp., Citigroup Inc., and Wells Fargo & Co. — account for more than 90 percent of derivatives contracts.

Dennis Kelleher, president of Better Markets, a group that advocates stricter financial regulation, said banks opposed the requirement for more price quotes ‘‘to prevent a level playing field, competition, and transparency.’’

Under the rule, banks and other financial institutions will be required to trade derivatives contracts on new electronic exchanges.

The trading commission’s chairman, Gary Gensler, said that would create more transparency because everyone who wants to compete in the marketplace will be able to see prices before deciding to invest. Prior to the rule’s adoption, they could not.

‘‘This is a significant shift toward market transparency from the status quo,’’ Gensler said.

Commissioner Bart Chilton said the commission could have achieved greater transparency by approving the original proposal. But he said a compromise was better than no action.

‘‘By failing to act, we leave in place unregulated dark markets. These are the very dark markets that got us into the economic mess in 2008,’’ Chilton said.

Wall Street banks had opposed the higher number of bids. The lower requirement illustrates how banks have managed to tweak mandates from Congress three years ago that regulators are finalizing.

The banks have also succeeded in weakening a rule that would ban banks from trading for their own profit. The latest version of the so-called Volcker Rule includes an exemption for banks to make such trades when they are used to offset others risks taken.

The rule was named after a former Federal Reserve chairman, Paul Volcker. Its adoption has been delayed largely because of the banks’ objections.

Loading comments...

You have reached the limit of 10 free articles in a month

Stay informed with unlimited access to Boston’s trusted news source.

  • High-quality journalism from the region’s largest newsroom
  • Convenient access across all of your devices
  • Today’s Headlines daily newsletter
  • Subscriber-only access to exclusive offers, events, contests, eBooks, and more
  • Less than 25¢ a week