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Panel I of a Hearing of the House Agriculture Committee - The Role of Credit Derivatives in the U.S. Economy

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Location: Washington, DC

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REP. JIM MARSHALL (D-GA): Thank you, Mr. Chairman. Gentlemen, do all of you, you know, representing your individual organizations, feel that you have been treated fairly and evenly by U.S. regulators? Anybody have a complaint about regulators and how you've been treated? I take it from all the shaking heads here and the lack of response, the answer is no. Are there actions Congress should take to clarify the current regulatory structure? We have a number of different agencies and we're wondering whether or not it would be helpful if we introduced legislation that would clarify jurisdiction or authority for these different agencies with regard to CDS' and the over-the- counter market generally? Mr. Duffy, I guess we'll start with you, as we always have.

MR. DUFFY: Well I think that, you know, with the Modernization Act of 2000 for the CFTC it's obviously been a model for the regulatory framework here in the United States. We have not had the problems under this agency that we have maybe seen in other product lines that are not under its jurisdiction. So, we commend the CFTC for all they have done. In order to facilitate to get these products up and moving it may be unfortunate but we may have to bifurcate some of the regulation which may not be a bad thing. For starters this is a highly contentious product around and I don't think a lot of people understand it quite well so it's not surprisingly that some are looking at these as securities, some are looking at these as futures and then the Fed is looking at it in a different way also. So to have bifurcation of regulation in this particular product I don't think is going to inhibit the growth of it. But it does need regulation, sir.

REP. MARSHALL: Are you saying -- is your comment that it would be helpful not to have bifurcation?

MR. DUFFY: My comment would be that I'd love to see this under the jurisdiction of the Commodity Futures Trading Commission but I don't believe that's to be realistic. I think that the SEC has got a part in this because they consider these bonds to be securitized contracts, which falls under their jurisdiction. So I don't think that's realistic. I'd love to see modernization of the Securities and Exchange Commission, like we had with the CFTC in 2000, and streamline the whole process.

REP. MARSHALL: You're view, I suspect, is that the statute is not clear concerning whether or not the SEC has authority. And if, in legislation, Congress clarified that the SEC does not have authority, in essence saying that once a swap has cleared that does not necessarily mean that it's a security. Is there -- are you troubled by the fact that the SEC would then be on the sidelines and not have regulatory oversight?

MR. DUFFY: No, I'm not troubled by it, sir.

REP. MARSHALL: Mr. Short.

MR. SHORT: I think one of the challenges for Congress in the coming session is to take a look at the overall financial regulatory scheme that we have and consider what improvements need to be -- need to be made. It is a little bit troubling to me that we have a system that has essentially silos where if you view a product one way or another way it could be subject to different ultimate regulatory regimes. I think there needs to be a harmonization. I would echo what Mr. Duffy said that the CFTC has done a fantastic job with the CFMA and the Modernization Act being a principles-based regulatory regime, and having some of those principles exported to other regulators and a harmonization of regulation, I think, would be appropriate.

REP. MARSHALL: Mr. O'Neill.

MR. O'NEILL: Generally speaking, we absolutely would welcome clarity. We've engaged with the CFTC, the SEC, and the Fed for this product, all with good result, we believe. We think, yeah, CFTC has done an excellent job of regulating the U.S. futures market. The thing we'd also note that the SEC has had responsibility for monitoring for insider trading and market manipulation, which is important for CDS. We'd also say that the NY Fed has a considerable range of knowledge in this area. So we hope however the U.S. regulatory situation is clarified, all that knowledge and all that skill can be brought to bear for the highest possible standards.

REP. MARSHALL: Mr. Book.

MR. BOOK: I would agree with that, for the clarification would certainly help. Also from the perspective of a foreign entity, we believe that the MCO is a good template. We have, with all the regulators involved here, very good, constructive dialog but certainly certainty and clarification here would help.

REP. MARSHALL: We have been concerned about regulatory arbitrage here, in essence, that we live in a lowest common denominator world with different jurisdictions offering less regulation in order to entice business. And it would be very helpful if across the Atlantic, at least, and hopefully globally we can, we can come up with some fundamental principles that everybody can abide by so that we do not continue to have this phenomena that leads ultimately to lax regulation and problems like the ones that we have today that are effecting so many ordinary folks all over the United States.

I yield back. Thank you, Mr. Chairman.

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