Derivatives - Senate oversight

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See also derivatives.


Lincoln’s derivatives plan meets resistance in her caucus

Senate Agriculture, Nutrition and Forestry Chairman Blanche Lincoln (D-Ark.) appears to be fighting an uphill battle to get her piece of the financial regulatory reform bill into the larger package before it hits the floor, possibly next week.

Though the Agriculture panel approved a bill this week that would regulate complicated financial instruments known as derivatives, Senate Democratic leaders and Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-Conn.) do not appear to be making it easy for Lincoln to plant her flag in Dodd’s broader measure, which already includes a less rigorous derivatives piece. Lincoln’s bill has been described as to the left of what most Democrats and the Obama administration have been seeking, but she did draw the support of one Republican —Sen. Chuck Grassley (Iowa) — during committee consideration.

The issue flared Wednesday during a meeting of Democratic committee chairmen, when the topic of derivatives came up. After Dodd suggested that her measure may not be folded into his bill but would have to battle it out on the floor as a stand-alone amendment, Lincoln “threw a fit,” one source said, and argued passionately for her committee’s bill.

Senate Majority Leader Harry Reid (D-Nev.) told Lincoln to work out her differences with Sen. Jack Reed (D-R.I.), a Banking panel member whom Dodd tapped to work on derivatives. But sources said Lincoln would prefer to work with Dodd on a chairman-to-chairman level.

Fans of Lincoln’s bill came to her aid at Thursday’s regular Democratic Policy Committee lunch with harsh criticisms for Dodd and Reid, sources confirmed.

At one point, Sen. Maria Cantwell (D-Wash.) stood up and attacked leaders for not showing Lincoln the respect she deserved on the issue. Cantwell also implied derisively that Banking Democrats believed they were smarter than others in the caucus, the sources said. With White House Senior Adviser David Axelrod, Communications Director Dan Pfeiffer and other presidential staff in attendance, Cantwell saved her sharpest criticisms for White House economic adviser Larry Summers and Treasury Secretary Timothy Geithner, who she said were working at cross purposes with Democrats in the Senate. Cantwell’s office did not return calls seeking comment.

Sen. Bill Nelson (D-Fla.) also rose to speak in Lincoln’s defense, sources said, but his rhetoric was more tempered.

Though she declined to characterize either meeting, Lincoln acknowledged that she is seeking equal treatment for her bill.

“First of all, I’m very grateful for, you know, a lot of support from colleagues that we’ve done a good job and I think they see that,” Lincoln said Thursday afternoon.

She added that she is determined to make sure her legislation, or a compromise she approves of, makes it into the underlying bill and does not get set up for near-certain failure as a stand-alone amendment.

“I was always told that it was going to be merged into the bill before we go to the floor,” Lincoln said. “I want to make sure that without a doubt, yes, I have a privileged ability to be able to be a part of this bill because that issue of derivatives squarely falls in the jurisdiction of the Agriculture Committee. So not only on behalf of myself, but on behalf of the Members of the Committee, I want to reinforce that and ensure that we maintain our jurisdiction and we maintain our place in the bill.”

Both Lincoln and Dodd said they believe they will be able to come up with an agreement of some sort before Reid calls a filibuster-breaking vote Monday evening on the larger Dodd measure.

“I’m confident we’ll resolve it,” said Dodd. Still, Dodd indicated that the issue would likely come up as an amendment.

That position was echoed by Senate Majority Whip Dick Durbin (D-Ill.), who said Lincoln is “in a difficult position” because Dodd’s bill was reported first and placed on the Senate calendar. Changing that bill to accommodate Lincoln could take more time than Reid may be willing to give as he tries to force a Monday showdown with Republicans who have said they may block it from coming up if the measure does not meet their standard for bipartisanship.

“Now, here’s Harry Reid who says, ‘What am I supposed to do? If I’m supposed to merge these two bills, then I’ve got to withdraw the Dodd bill, merge them, start over again on the calendar,’” Durbin explained, saying the process could take “days or weeks.”

Durbin added that Reid “is saying to [Lincoln], ‘Sit down with Dodd. Find out how close you can come and whether you can reach an agreement, which would be the ultimate positive outcome, and then we’re going to find out how we can bring the Lincoln language into the Dodd bill with the two of them on the floor.’” Durbin indicated that would likely be accomplished through an amendment, rather than as a part of the underlying bill.

However, a substitute amendment that replaces the entire bill could be used to insulate Lincoln’s piece from the dangers that more discrete amendments face. To take that option, Lincoln and Dodd would need to reach a deal on derivatives before the Senate adopts the motion to proceed to the measure.

One source speculated that Democratic leaders and the White House want Lincoln’s derivatives legislation to fail, because they do not support her approach.

Senator Lincoln's bill passes out of Senate Agriculture Comm

Tough regulation of derivatives moved through Blanche Lincoln's Agriculture Committee with the surprising support of Republican Charles Grassley (R-Iowa) amid signs that the GOP is softening its opposition to financial regulatory reform.

Grassley's vote gives Democratic efforts at reforming Wall Street a crucial bipartisan sheen as they charge toward the Senate floor, but Grassley warned that he was no guaranteed yes vote for the final product. Last year, he played a role in health care negotiations before dropping out after claiming the bill could "pull the plug on Grandma."

On a conference call with Iowa reporters after the vote, Grassley said, "The Lincoln bill is an important step in the right direction."

"My vote today for this reform doesn't mean that I'll be able to support the larger financial reform bill on the Senate floor. The derivatives piece is significant but that larger bill has a number of flaws that need to be resolved before I support it."

Grassley's vote comes as Republicans seem to be warming to elements of the legislation. During the mark-up, Sen. Saxby Chambliss (R-Ga.), the ranking Republican on the committee, repeatedly praised Lincoln and said he largely agreed with what was in the package, but not enough to support it yet.

Lincoln hailed the bipartisan vote. "The Senate Agriculture Committee has taken a significant step toward bringing real reform to our nation's financial markets, providing the transparency and accountability that the American people deserve in a bipartisan way. My bill will bring the $600 trillion derivatives market out of the dark and into the light of day, ending the days of backroom deals and putting this money on Main Street where it belongs," Lincoln said in a statement after it passed.

"...The bankers' lobbying has focused on the Senate Agriculture Committee, which Wall Street hoped would produce a friendlier bill than an alternative from the Senate Banking Committee. But it became clear Tuesday that the Agriculture Committee's chairman, Arkansas Democrat Blanche Lincoln, is now expected to introduce a bill with provisions that bankers oppose and the White House supports.

In the past few days, officials from [[Goldman Sachs|Goldman's] New York headquarters came to Washington to meet with the Agriculture Committee staff. A prominent J.P. Morgan official, Blythe Masters, a frequent contributor to Democrat campaigns, has both testified in public and met privately with the panel's aides. Earlier this year, J.P. Morgan hosted Sen. Lincoln in New York where she met with senior executives. The bank's political action committee contributed $5,500 on Jan. 14 to her reelection campaign..."

Reed's bill - "Comprehensive Derivatives Regulation for 2009"

Senator Reed's proposed legislation for derivatives regulation

To comprehensively regulate derivatives markets to increase transparency and reduce risks in the financial system.


Mr. REED introduced the following bill; which was read twice and referred to the Committee on

  • A BILL:

To comprehensively regulate derivatives markets to increase transparency and reduce risks in the financial system.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; TABLE OF CONTENTS. (a) SHORT TITLE.—This Act may be cited as the ‘‘Comprehensive Derivatives Regulation Act of 2009’’.

See the link for the proposed legislation.

Reed proposes SEC regulate CDS and security-based futures

"U.S. Senator Jack Reed proposed giving the Securities and Exchange Commission jurisdiction over futures based on securities, which are now overseen by the Commodity Futures Trading Commission.

The legislation introduced today by Reed, a Rhode Island Democrat who leads a Senate banking subcommittee that oversees the securities industry, also requires guaranteeing all standardized over-the-counter derivatives with central counterparties. The SEC and CFTC have been told by the Obama administration to work out which agency should oversee various assets classes like interest-rate and credit-default swaps.

The bill “amends the definition of ‘security future’ in the federal securities laws to provide the SEC with authority over all security futures, not just single-security and narrow- based security index futures,” according to a summary of Reed’s bill put out by his office today.

To accomplish the new SEC oversight, Reed proposes “a provision to transfer employees of the CFTC to the SEC, with protections in pay and benefits, if such employees would be more effectively utilized at the SEC.”

The CFTC has overseen futures contracts based on equity indexes like the Standard & Poor’s 500 Index and on Treasury debt since their inception decades ago. CME Group Inc., the world’s largest futures exchange, trades futures on the S&P 500 index as well as other equity indexes, Treasuries and interest rates and is regulated by the CFTC."

Harkin's bill S. 272 Derivatives Trading Integrity Act

A bill to amend the Commodity Exchange Act to ensure that all agreements, contracts, and transactions with respect to commodities are carried out on a regulated exchange, and for other purposes.


Derivatives Trading Integrity Act of 2009 - Amends the Commodity Exchange Act to:

  1. repeal the exemption or exclusion from regulation by the Commodity Futures Trading Commission (CFTC) of specified derivative transactions, swap transactions, and related electronic trading facilities;
  2. restrict futures trading to contract markets or derivatives transaction execution facilities; and
  3. abolish exempt boards of trade.

Cantwell's bills

"Current law makes it difficult for the Commodities Futures Trading Commission to effectively meet its mandate to investigate and punish market manipulation, resulting in little or no deterrent against abusive practices. This is because current law sets a very high bar for the CFTC to prove market manipulation. By comparison, a lower burden of proof makes it much easier for the Securities and Exchange Commission (SEC), the Federal Energy Regulatory Commission (FERC), and the Federal Trade Commission (FTC) to prove and deter market manipulation.

The CFTC must prove “specific intent” to do harm, rather than the “recklessness” standard used by the SEC for the past 75 years, and recently employed by the FERC and FTC. “Specific intent” is a much more difficult standard to prove. In fact, the standard is so weak that in its 35-year history, the CFTC has successfully prosecuted and won only one case of manipulation in the futures markets.

Cantwell’s bill would give the CFTC the same “reckless conduct” standard currently used by the SEC, the FERC, and the FTC against manipulation. It would establish a bright line so that the CFTC can effectively enforce and deter market manipulation in commodity futures and derivatives markets. Cantwell’s bill would make it clear that market manipulation resulting from “reckless conduct” will be illegal.

"In 2000, Congress passed a little-known provision in the Commodities Futures Modernization Act (CFMA) of 2000 that exempts derivatives traders from state gambling regulations. Cantwell’s proposal would repeal this provision. Since the CFMA went into effect, the derivatives market has ballooned from $80 trillion to more than $600 trillion. The lack of any regulations at the federal level meant that, in effect, the 2000 law made it open season for rampant derivatives speculation that culminated in the economic collapse of 2008.

The legislation Cantwell, Wyden and Sanders proposed today sends the message to derivatives dealers that if they somehow succeed in preserving regulatory loopholes at the federal level, they will still face tough regulatory oversight at the state level.

“Our ultimate goal is a strong, uniform set of federal regulations,” Cantwell continued, pointing to legislation proposed today by Senator Christopher Dodd (D-CT), chairman of the Senate Committee on Banking, Housing and Urban Affairs, that seeks to address loopholes and exemptions in federal derivatives law. “I am pleased that Senator Dodd today is moving forward with important legislation to regulate the dark derivatives market, and I look to the Senate Agriculture Committee to play a critical role as well. Congress must take a strong stand to prevent the kinds of abuses that have cost American workers and taxpayers so much. Empowering states restores an important layer of protection.”

While the Senate Banking Committee is proposing new rules on derivatives markets, the Senate Agriculture Committee has primary jurisdiction in amending the Commodity Exchange Act – the law that governs derivatives trading.

Senate Agriculture Committee hearing on Dec 2


Panel 1: Commodity Futures Trading Commission

Panel 2: Stakeholders

  • Mr. Terrence Duffy, Executive Chairman, CME Group, Chicago, IL
  • Mr. Johnathan Short, Senior Vice President, General Counsel and Corporate Secretary, Intercontinental Exchange (ICE), Atlanta, GA
  • Mr. Larry Thompson, Managing Director and General Counsel, The Depository Trust & Clearing Organization (DTCC), New York, NY
  • Mr. Peter Axilrod, Managing Director, The Depository Trust & Clearing Organization (DTCC), New York, NY
  • Ms. Blythe Masters, Managing Director and Head of Global Commodities Group, JPMorgan Chase & Co., New York, NY
  • Mr. Jiro Okochi, CEO,, Inc., New York, NY

Joint Economic Committee hearing Dec 2

The Joint Economic Committee held a hearing entitled “Unregulated Markets: How Regulatory Reform Will Shine A Light in the Financial Sector.” The hearing examined how the financial sectors referred to as the “dark market,” the unregulated over-the-counter market, and lightly regulated mortgage markets contributed to the financial crisis.

Testifying before the Committee were the following individuals:

  • Brooksley Born, former Chair of the Commodity Futures Trading Commission
  • Robert Litan, Senior Fellow in Economic Studies, Brookings Institution, Vice President of Research and Policy at the Ewing Marion Kauffman Foundation, and member of the Task Force on Financial Reform
  • James Carr, Chief Operating Officer, National Community Reinvestment Coalition
  • Robert K. Steel, former Under Secretary for Domestic Finance, United States Treasury, chairman of the board of The Aspen Institute and a member of the Task Force on Financial Reform

In her opening remarks Committee Chairwoman Carolyn Maloney (D-NY) asserted that the financial crisis was triggered in part by the highly unregulated over-the-counter (OTC) derivatives and credit default swap (CDS) markets that, in the absence of regulation, created an “illusion that the assets [underlying such products] were risk-free.” She also noted that “[a]t its peak, this unregulated market was tied to $680 trillion in assets,” an amount equal to 50 times the U.S. GDP, placing the financial stability of the United States and the global economy at risk, and emphasized the need to adopt “common-sense regulation of the financial services industry to insure stability and safety of the system.”

Ms. Born stated that certain regulatory gaps, including a failure to regulate OTC derivatives, played a significant role in the financial crisis. She stated that, from the perspective of a former regulator, the lack of transparency and price discovery, excessive leverage, undue speculation, inadequate capital and prudential controls made the market “extremely dangerous.” Ms. Born stressed that the CFTC and the SEC should be granted primary “regulatory responsibilities” for the trading of derivatives both on and off exchanges. In addition, she noted that, with respect to futures and options, “all standardized and standardizable derivatives contract[s] should be traded on regulated derivatives exchanges and cleared through regulated derivatives clearing operations” with no exceptions.

Senate Agriculture Committee hearing on Nov 18


  • The Honorable Gary Gensler, Chairman, Commodity Futures Trading Commission
  • The Honorable Glenn English, Chief Executive Officer, National Rural Electric Cooperatives
  • Mr. Neil Schloss, Treasurer, Ford Motor Company
  • Mr. Mark Boling, Executive Vice President & General Counsel, Southwestern Energy Company
  • Mr. Jeff Billings, Manager of Risk Management, Municipal Gas Authority of Georgia on behalf of the American Public Gas Association Kennesaw, GA
  • Mr. Robert A. Johnson, Director of Economic Policy, The Roosevelt Institute, on behalf of the Americans for Financial Reform

"As Congress crafts legislation to impose new oversight on complex instruments blamed for hastening the financial crisis, a major sticking point has emerged over companies that use the derivatives to hedge risk.

Some lawmakers want to exempt so-called "end users" of derivatives from new capital and other requirements in the overhaul legislation. A potent coalition of about 170 companies that use derivatives -- including Boeing Co., Caterpillar Inc., Ford Motor Co., General Electric Co. and Shell Oil Co. -- has been lobbying Congress to say that regulation of derivatives without exceptions could severely increase costs for corporate America.

That could mean higher costs passed on to consumers and imperiled jobs, they contend.

"We are concerned that imposing clearing, margin and capital requirements on end users would significantly increase our cash requirements and costs," Ford Vice President and Treasurer Neil Schloss testified.

Echoes of support came from several members of the Senate Agriculture Committee at a hearing Wednesday.

"This has some very, very serious consequences" for farmers and other businesses, said Sen. Mike Johanns, R-Neb.

Sen. Debbie Stabenow, D-Mich., said it would be a hardship for manufacturing companies to have to divert sorely needed working capital to put up as collateral under the new requirements.

But Gary Gensler, chairman of the Commodity Futures Trading Commission, told the panel that if Congress decides to exempt some end-user transactions, the exception should be "explicit and narrow."

Broader exemptions could allow financial market players such as hedge funds, for example, to benefit from them, Gensler says.

The value of derivatives hinges on an underlying investment or commodity -- such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.

Companies of all kinds use derivatives to hedge against risks -- airlines ensuring against spikes in fuel prices, for example. At the same time, derivatives have become a growing vehicle for financial speculation and ballooned into a sprawling $600 trillion market. Regulators say they pose a threat to the stability of the financial system.

Credit default swaps, a form of insurance against loan defaults, account for an estimated $60 trillion of the derivatives market. The collapse of the swaps brought the downfall of Wall Street banking house Lehman Brothers Holdings Inc. and nearly toppled American International Group Inc. last year.

The subsequent $180 billion taxpayer bailout of the insurance conglomerate damaged manufacturers and the economy. Tough new oversight of an unregulated global derivatives market is needed to prevent another crisis, Gensler said.

Sen. Blanche Lincoln, D-Ark., the Agriculture Committee chairman, may draft a bill to regulate derivatives. At the same time, Senate Banking Committee Chairman Christopher Dodd, D-Conn., has proposed a derivatives measure with exemptions for end users that are narrower than those in the House legislation."

Senate Banking Committee hearing on June 22

In a Senate Banking Committee hearing on June 22, 2009 lawmakers raised issues which will help shape legislation for the oversight of derivatives. The main issues discussed at the hearing include:

  • How will derivatives regulation fit with the establishment of a systemic regulator and international regulation and oversight?
  • The definition of "'standardized' versus 'custom' derivatives". No clear understanding emerged.
  • Are derivatives a form of insurance or speculation? Derivatives are used for both.
  • Regulating derivatives in the context of linked "cash" securities market (eg corporate bonds and CDS)
  • Likely that interest rates, foreign exchange, commodities, energy, and metals derivatives will be overseen by the CFTC.
  • Likely responsibility for "securities-related" OTC derivatives would be retained by the SEC,
  • If OTC derivative oversight is bifurcated how will dealers be regulated?(eg as overseen by the CFTC and/or the SEC)? Typically dealers trade all types of derivatives.
  • CFTC Chairman Gensler discussed regulating "big market functions" for example central clearing facilities and "regulated trading venues".
  • Federal Reserve belives that there should be priority on the development of a "trade information warehouse" for all asset classes.
  • All regulators must share information about oversight (XBRL?).
  • Chairman Gensler suggested that the public should have access to realtime data like TRACE for products trading on exchanges and alternative trading systems (ECNs).
  • The use of margin and collateral will enhance system stability.
  • Chairman Gensler suggested that approximiately half of the OTC deriv markets are standardized. He said that generally if you can't standardize a product it is harder to unwind in times of crisis and therefore has more risk.
  • Will bank regulators oversee the derivatives trading activities of the broker/dealers subsidiaries of commercial banks (Citi, JPM, Goldman Sachs, Morgan Stanley)?
  • The Federal Reserve supports giving access to borrowing to a CCP in a a crisis.
  • Two views of derivatives... 1) 'weapons of mass destruction' 2) useful products that serve to rationalize markets by balancing risk between many entities.
  • Derivatives are systemically unstable if not referenced to an underlying cash market.
  • In a CCP should customer cash be segregated?
  • "Empty creditor" phenomenon where CDS holder has incentive to aggressively demand collateral and whose interests are often not aligned with the name on which they hold CDS.
  • There is no market for CDS for midsize companies only large names.
  • Price transparency will reduce the profits of the handful of dealers who currently control these markets.
  • Smaller market participants will mostly benefit from increased transparency.

Members, who exempted private derivatives from oversight in 2000, are targeting the financial instruments after American International Group Inc. needed a $182.5 billion U.S. bailout because of credit-default swap trades on mortgage-linked securities.

“One of the key underlying problems in the whole lead-up to the meltdown was too much leverage, too little capital or too little collateral,” Mark Halverson, a staff director for Senate Agriculture Committee Chairman Tom Harkin, said in an interview.

Harkin, an Iowa Democrat, is pushing his own legislation that would require all over-the-counter derivatives trades be cleared through a regulated exchange. Such an arrangement would subject the contracts to margin and collateral requirements. Harkin, who endorsed Obama’s proposal to move some trades to an exchange and regulate all dealers, still plans to press forward.

(Source: Bloomberg June 22, 2009)

The Senate Agriculture Committee introduced S. 272 deferred

  • -- Requires exchange trading of all OTC derivatives
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