A "Description of Principles" concept paper by Barney Frank essentially proposes that only dealers are allowed to trade CDS going forward. Barney believes, this is critical to "limiting speculation." Here is what will actually be considered:
1. Limitation on Speculation
Prohibition on any purchase of credit protection using a CDS contracts unless:
- The party owns the referenced security or (one or more) of the securities in an index of securities.
- The party has a bona fide economic interest that will be protected by the contract.
- The party is a bona fide market maker.
- Regulators will have authority to monitor market activity and impose position limit where necessary.
Here is Barney's tremendous regulatory insight on the matter:
"The fundamental purpose here is to improve the regulation of derivatives so that they continue to perform their important market function but are less likely to contribute to a kind of irresponsibility that can cause a crisis. Nobody here wants to ban them or even severely diminish them as an economic instrument. The Committee on Agriculture represents a lot of end users for whom they are very important. The Committee on Financial Services deals with a lot of the financial institutions. They have an interest that has to be blended. I thank Chairman Peterson and his staff for their cooperation on this effort."
Well, if the Committee on Agriculture believes that Merrill trading exclusively with Goldman and vice versa will promote lower irresponsibility, we can see why they are the Committee on Agirculture.