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Gov't Crackdown On Loosely Regulated Securities


The CME jumped about 12% this week, with investors betting this exchange has the most to gain as the US cracks down on loosely regulated derivatives.

As you may have read, the Obama administration moved on Wednesday to exert more control over the shadowy over-the-counter derivatives market, now closely linked to the global credit crisis.

Federal regulators proposed subjecting all over-the-counter derivatives dealers -- whose trades are not made through an exchange, making them hard to monitor -- to "a robust regime of prudential supervision and regulation," including conservative capital, reporting and margin requirements.

The plan, sketched out by Treasury Secretary Timothy Geithner and top regulators at a news conference, marks a big step in the administration's push to rewrite rules for banks and financial markets in response to a credit crisis that has sent economies around the globe reeling.

In the United States, four large banks currently control over 90 percent of the derivatives market: JPMorgan Chase , Bank of America , Citigroup , and Goldman Sachs . All have received taxpayer aid.

The Cowboy Trade

What’s the trade?

Exchanges have already begun to jockey for business clearing OTC derivatives.

The Intercontinental Exchange and CME Group , which runs the Chicago Mercantile Exchange, are the two main contenders in the race, with ICE benefiting from support from large dealers that own a stake in the company.

The ICE began clearing credit default swaps in March.

CME and ICE will benefit the most from the proposed changes, if they become law, said Fox-Pitt Kelton Cochran Caronia Waller analyst Edward Ditmire in a research note.

"Both own U.S. clearinghouses and have significant over-the-counter experience," Ditmire wrote, adding that the CME is the "biggest winner".

Jim Delaney of Saratoga Capital echoes those sentiments on Fast Money. To see our complete interview with Delany please watch the video above.

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Trader disclosure: On May 15th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour Owns (DRYS), (RIMM), (RIG), (TSL), (F), (AAPL), (BAC), (BX), (EEM), (FXI), (TSL); Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Finerman's Firm Owns (PBR), (RIG); Finerman's Firm Owns (BAC) Preferred, (WFC) Preferred; Finerman's Firm Is Short (XRT), (BAC), (WFC); Najarian Owns (CELG); Najarian Owns (AMD) Calls; Najarian Owns (BX) Calls; Najarian Owns (INTC) Calls; Najarian Owns (MOS) Call Spread; Najarian Owns (XHB) Call Spread; Najarian Owns (XLB) Call Spread; Najarian Owns (XLU) Calls