By Dawn Kopecki
October 3, 2009
SourceOct. 3 (Bloomberg) -- Legislation tightening oversight of the $592 trillion over-the-counter derivatives market would give regulators authority to ban so-called abusive swaps.
The Securities and Exchange Commission and Commodity Futures Trading Commission would get the power to “prohibit transactions in any swap” that regulators determine “would be detrimental to the stability of a financial market or of participants in a financial market,” according to a 187-page draft measure released yesterday by House Financial Services Committee Chairman Barney Frank.
Opaque financial products, including some derivatives, have contributed to almost $1.6 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Among fallen companies are Lehman Brothers Holdings Inc., the investment bank that filed for bankruptcy, and insurer American International Group Inc., which has been surviving on government loans.
“Lacking and lagging regulation of OTC derivatives was a major contributing factor to last year’s crisis, including the highly leveraged credit-default swaps at AIG that prompted government intervention,” Representative Melissa Bean, an Illinois Democrat who serves on Frank’s committee, said in an e- mailed statement.
The legislation offered by Frank, a Massachusetts Democrat, would require the most common and actively traded over-the- counter derivatives contracts to be bought and sold on exchanges or processed through a regulated trading platform.
‘Clear Window’
“We can’t effectively protect American consumers -- and make sure they are paying fair prices for food, gas and other commodities -- unless we have a clear window into the trading that affects commodity pricing,” Bart Chilton, a CFTC commissioner, said in a statement that described Frank’s proposal as helping “to move this discussion down the road.”
The measure also would give the Treasury Department the final say if the SEC and CFTC couldn’t agree on joint regulations, including setting position limits or the treatment of products that are economically similar, such as stock options and stock futures. A three-page proposal released by Frank in July would have given that power to a new Financial Services Oversight Council.
Derivatives are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. Credit-default swaps are derivatives that were created primarily to protect lenders and bondholders from company defaults. Some lawmakers and regulators have said they may have been used to spread false rumors about financial companies to drive down stock prices.
‘Naked’ Swaps
Frank’s proposals stopped short of barring “naked” credit-default swaps, where the buyer doesn’t own the underlying asset being hedged. The lawmaker had said he was considering such a ban.
The draft by Frank won praise from potential opponents in the New Democrat Coalition. The group, which includes Bean and describes itself as moderate and “pro-growth,” had offered competing legislation that would have given Treasury veto power over regulations enacted by the SEC and the CFTC.
“Chairman Frank’s draft provides a solid start to discussions about reforming the derivatives market,” said Representative Michael McMahon, a New York Democrat who was lead sponsor of the competing measure.
To contact the reporter on this story: Dawn Kopecki in Washington at
dkopecki@bloomberg.com.
Last Updated: October 3, 2009 00:00 EDT