Strong Limits on Derivatives and Prop Trading Still Needed Says Investor Advocate

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“At long last it appears that reform of the U.S. financial system is taking shape, with all eyes on the Senate Banking Committee,” said Jim Allen, CFA of CFA Institute. “We are hopeful that the outcome of the current discussions is something that will reflect the needs and interests of investors. “

At long last it appears that reform of the U.S. financial system is taking shape, with all eyes on the Senate Banking Committee

Jim Allen, CFA, head of capital markets policy at CFA Institute noted that Congress is starting to focus its attention more on financial market regulation. “At long last it appears that reform of the U.S. financial system is taking shape, with all eyes on the Senate Banking Committee,” said Allen. “We are hopeful that the outcome of the current discussions is something that will reflect the needs and interests of investors. “

Also last week, the Obama Administration reiterated its plans for banking reform, including proposals to curb proprietary trading and to separate traditional banking functions from riskier enterprises. Allen noted that these ideas “have been discussed for months, so should not have come as a surprise to the banking industry.”

The Investors’ Working Group considered many of these issues in its report, “U.S. Financial Regulatory Reform: The Investors’ Perspective,” released in July, including the following recommendations:

  • Imposing careful constraints on proprietary trading at depository institutions and their holding companies. Proprietary trading creates potentially hazardous exposures and conflicts of interest, especially at institutions that operate with explicit or implicit government guarantees. Ultimately, banks should focus on their primary purposes, taking deposits and making loans.
  • OTC derivatives markets should essentially be eliminated, with very few exceptions. Standardized derivatives should trade on regulated exchanges and clear centrally and OTC trading in derivatives should be strictly limited and subject to robust federal regulation by the SEC and CFTC.

About CFA Institute
CFA Institute is the global association for investment professionals. It administers the CFA and CIPM curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has nearly 100,000 members, who include the world’s 86,400 CFA charterholders, in 133 countries and territories, as well as 136 affiliated professional societies in 57 countries and territories.

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Kathy Valentine
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