A major crisis is building in the derivatives market yet a cabal on Wall Street is blocking the formation of a clearing house that could stop the next financial meltdown, a senior official with the Kauffman Foundation said on Tuesday.

The need for disclosure in the swap markets is enormous, yet the will to act is missing because of a small cadre of special interests, said Harold Bradley, who oversees almost $2 billion in assets as chief investment officer at Kauffman.

“There is no incentive from the moneyed interests in either Washington or New York to change it,” Bradley told the Reuters Global Exchanges and Trading Summit in New York. “I believe we are in a cabal. There are five or six players only who are engaged and dominant in this marketplace and apparently they own the regulatory apparatus,” he said. “Everybody is afraid to regulate them.”

U.S. and European officials are trying to craft new rules to regulate the $450 trillion private derivatives market in broad efforts to avoid another financial crisis. Policy-makers generally agree that most standardized derivatives should be traded on exchanges or cleared through a clearinghouse, which would assume the risk of a default.

Bradley said those efforts fall short. There needs to be a national market system for fixed income and credit with displayed prices and the posting of open interest and market positions, he said. Instead, he said regulators have found a boogeyman in high-frequency trading, which has taken the focus off the highly levered derivatives market. After falling in 2008, the nominal value of derivatives is now greater than ever at about $204.3 trillion, according to Ned Davis Research Inc.
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Fears that high-frequency trading could spark the next market meltdown are unfounded, Bradley and other speakers at the summit said. “We’re going to talk about high-frequency trading instead of the flash points that set off nuclear bombs around our financial markets,” Bradley said, referring to the ever-expanding and loosely regulated market for derivatives.

http://www.youtube.com/watch?v=vq5KNgyPjfM&feature=player_embedded