"The Wall Street Transparency and Accountability Act of 2010," Democrats say, aims to set forth a number of guidelines for regulation of the financial markets, including ending "too big to fail" for financial institutions, setting up a consumer financial protection bureau and regulating financial derivatives.
The table is set. And we, the American public, are all invited to watch the digestion process unfold before us. It is unclear exactly how much Republican support the bill will get, although the early indication is that, unlike the healthcare debate, there is a foundation of common ground.
At this stage, the bill's prospects are still uncertain, but it is clear that many of the big banks are not pleased about the prospect of financial reform. Whatever the merits of the bill may or may not be, there is a clear opportunity for investors.
A key provision of the legislation, the regulation of financial derivatives, could deliver a whole new wave of business to a handful of companies.
As it stands now, many derivatives contracts are traded over-the-counter, meaning directly between two parties. Many derivatives, including much-maligned credit default swaps, are traded this way. The current bill requires that almost all derivatives be approved by the Commodity Futures Trading Commission and traded on open exchanges -- the reasoning being that this will bring transparency to the process and avoid some of the practices that led to the mortgage crisis.
Put simply, this could be a gold rush for exchange operators like CME Group (CME), NYSE Euronext (NYX) and IntercontinentalExchange (ICE). (StreetAuthority CME Group in September 2009, citing its consistent ability to post operating margins above 50% . . . but any one of these companies could receive a huge boost.)
These companies earn a fee for each listing on one of its exchanges, making it essentially a business that thrives on volume. If a financial institution gets a derivatives contract cleared and ready to trade, under the current legislation, it will have to go through one of these companies to do it.
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