The Dodd-Frank Act, a law passed to prevent the passage of Glass-Steagall and other necessary reforms, is now being used openly to protect the derivatives market! Earlier this week, the Financial Stability Oversight Council (FSOC) designated two giant derivatives exchanges as "systemically important financial institutions" (SIFIs), a designation which entitles them to borrow money from the Federal Reserve's discount window and other loan facilities during emergencies. The FSOC was created by Dodd-Frank, which also authorizes the Fed to lend money to SIFIs.
The FSOC is dominated by the Obama Administration. Treasury Secretary Tim Geithner is chairman of the Council, the members of which includes Ben Bernanke of the Fed, the heads of the Comptroller of the Currency, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, and others.
Three institutions are known to have been granted SIFI status this week, according to Bloomberg:
- The Intercontinental Exchange's ICE Clear Credit, the world's largest credit-default swap clearinghouse;
- CME Inc., the clearinghouse owned by the Chicago Merc; and
- Clearing House Payments Co., which operates both domestic and international financial wire-transfer systems.
With these moves, the Obama Administration is implicitly preparing to bail out the derivatives market and the international payments system. When derivatives are traded on exchanges, the clearinghouse acts as a middleman and guarantees payment, which means the clearinghouses are facing huge losses as the system dies.