The big banks that dominate derivatives trading resisted letting in smaller firms, arguing that doing so would make the clearinghouses vulnerable. They have a point: a clearinghouse with a bunch of undercapitalized members would be more prone to failure, unable to pony up when one side of a trade defaults, and we would be back where we started.

Andrew Harrer/Bloomberg News

When the architects of the Dodd-Frank regulatory overhaul flinched from the most effective solution — breaking up the banks so that none would be too big to drag down the financial system — they forced regulators of the derivatives market into a cumbersome and potentially dangerous workaround.

Those regulators are feverishly making lots of important, arcane rulings that are being followed only by insiders. They are replacing an opaque system prone to failures with a new, huge Rube Goldberg-like system that may reduce global financial risk. Or it may not. Nobody knows, not least the regulators themselves.

Funny thing: the way the concept of credit derivatives was explained to me sort of made it sound like the daisy chain of "risk management" didn't actually diffuse the systemic risk in the derivatives market. (AIG was just one of the now bailed-out companies that used derivatives to "manage risk.") Well, Commodity Futures Trade Commission chair Gary Gensler thinks Frank should "eliminate the 'risk management' exclusion altogether." Frank says that he will "sharpen" the bill, saying, "I don't think what he says is accurate, but my view is why take the chance? So we agree with him as to the concepts and we'll make the language very clear." And Barry Ritholtz, over at The Big Picture, basically says: NO, NO, NO, YOU'RE DOING IT WRONG.

Hey kids! Were you holding out hope that someone might do something to robustly regulate the derivatives market that wrought such wrack and ruin to the global economy? Ha, ha, that's adorable! Tina Seeley and Dawn Kopecki report for Bloomberg today that "Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules." Great!

Here's where the specific exemption lies:

A plan offered by the Obama administration would subject all swaps dealers and "major market participants" to new regulations for capital, business conduct, record-keeping and reporting. [Representative Barney] Frank's version would exempt corporations from that definition if they use derivatives for "risk management" purposes.

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