Divided Witnesses Testify On Derivatives Regulation Proposal
February 04 2009 - 11:00AM
Dow Jones News
A group of sharply divided witnesses appeared before the House
Agriculture Committee Wednesday to testify on a sweeping draft bill
which would drastically change the landscape for derivatives
regulation by requiring mandatory clearing for swaps.
The chief executive officer for the International Swaps and
Derivatives Association, a trade group, offered a scathing critique
of the proposal, saying that its current wording would "have a
disastrous effect for the large majority of these corporations by
taking away basic risk management tools."
Others, meanwhile, countered that view, saying the bill will go
a long way toward lessening the systemic risk associated with
over-the-counter derivatives by requiring centralized clearing for
most of the contracts.
"Nasdaq OMX is highly supportive of provisions in Section 13 of
your legislation that would protect our financial system and
investors by requiring most over-the-counter derivatives to be
settled and cleared," said Chris Concannon, Nasdaq's executive vice
president of transaction services in prepared remarks. "We believe
this section is good public policy and hope to see it enacted into
law."
Wednesday marked the second in a series of hearings to debate a
bill drafted by House Agriculture Chairman Collin Peterson, D-Minn.
The bill is a beefed up version of one that failed to become law
last year.
The bill would require the Commodity Futures Trading Commission
to set speculative position limits for all commodities and also
require the agency to disaggregate and publicly provide position
limits collected from index funds.
It also would require mandatory clearing for most
over-the-counter derivatives unless otherwise exempted by the CFTC.
In addition, it includes a highly controversial provision to ban
so-called "naked" credit-default swaps in which investors do not
own any of the underlying bonds.
Currently there are already efforts underway in the private
sector to offer clearing services for credit-default swaps,
including proposals by IntercontinentalExchange Inc. (ICE), CME
Group (CME), Eurex and NYSE Euronext. But whether clearing should
be mandated still remains a big question.
Johnathan Short, ICE's senior vice president and general
counsel, raised similar concerns about the proposed naked
credit-default ban that were raised by CME on Tuesday.
"Credit-default swaps perform an important market function in
allowing parties to hedge credit risk," Short said in prepared
testimony. "The goals of transparency and mitigation of
counterparty credit risk and systemic risk can be achieved through
central clearing of credit-default swaps...Section 16 would run
counter to this goal."
Following Tuesday's hearing, Peterson said he is still not sure
what the final draft bill will look like. He said he put certain
provisions in the bill, such as the ban, to "engender debate," and
while he still plans to keep an open mind, he also didn't appear
swayed by arguments that mandated clearing isn't the answer.
"If something is too risky that nobody will clear it...then in
opinion, those kinds of things should not be written in the first
place," he said,
Peterson plans to have witnesses from the Securities and
Exchange Commission, the CFTC and the Federal Reserve testify on
the bill next week before it goes to the committee for a
markup.
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634;
sarah.lynch@dowjones.com
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