Swap Industry: 11-20-08 Harkin Measure Would Require Openess, Transparency & Integrity

Release here.

Senator Tom Harkin (D-IA) today called for establishing stronger standards of openness, transparency and integrity in the trading of swaps and other over-the-counter financial derivatives as a critical step toward rebuilding and restoring confidence in the financial system. Harkin will introduce legislation to accomplish these objectives today. With the total face value of swaps reaching a high of some $531 trillion for the middle of this year – eight and a half times the world GDP of $62 trillion – it is long past time for accountability in the markets. Over the years, the Commodity Futures Trading Commission (CFTC) and Congress have accommodated the swaps industry by allowing instruments that are essentially futures contracts to be privately negotiated without the safeguards provided through exchange trading. Renowned investor Warren Buffett has called derivatives “financial weapons of mass destruction” if they are not properly understood and managed.

“The economic downturn in this country is forcing us to examine all contributing factors to the crisis in our financial markets,” said Harkin. “By restoring reasonable safeguards and regulation of swaps, including credit default swaps, along with all futures contracts, this legislation will go a long way toward ensuring confidence in the markets and reestablishing soundness and integrity that the financial system needs.

“My bill will end the unregulated ‘casino capitalism’ [My emphasis]that has turned the swaps industry into a ticking timebomb. And it will bring these transactions out into the sunlight where they can be monitored and appropriately regulated.”

The Derivatives Trading Integrity Act will bring more transparency and accountability into the marketplace. Specifically, the bill amends the Commodity Exchange Act to eliminate the distinction between “excluded” and “exempt” commodities and regulated, exchange-traded commodities; futures contracts for all commodities would be treated the same.

In addition, the bill eliminates the statutory exclusion of swap transactions, and ends the CFTC’s authority to exempt such transactions from the general requirement that a contract for the purchase or sale of a commodity for future delivery can only trade on a regulated board of trade. In effect, this means that all futures contracts must trade on a designated contract market or a derivatives transaction execution facility. Virtually all contracts now commonly referred to as swaps fall under the definition of futures contracts and function basically in the same manner as futures contracts.

Last month, the Senate Agriculture Committee heard dramatic testimony about the impact of unregulated financial derivatives on the U.S. economy. Terrence Duffy, Executive Chairman of the Chicago Mercantile Exchange, told the Committee: “It has been the lack of price transparency and the failure to properly measure and collateralize the risk of those instruments in the over-the-counter markets that has had dire consequences. In stark contrast, trading of financial futures on regulated futures markets, subject to the oversight of the Commodity Futures Trading Commission, has been a net positive to the economy, has caused no stress to the financial system and has easily endured the collapse of one and near collapse of two firms that were very active in our markets.”

Senator Harkin has a history of raising questions about these contracts with federal officials. At a February 10, 2000 hearing of the Committee, Harkin, in his position as Ranking Member, asked then- Chairman of the Federal Reserve System Alan Greenspan and then-Secretary of the Treasury Lawrence Summers about the potential threats to the financial system from their proposal to deregulate financial swaps and over the counter derivatives.