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Public Statements

Wall Street Reform And Consumer Protection Act Of 2009

Floor Speech

By:
Date:
Location: Washington D.C.

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Mr. LYNCH. Good evening, Madam Chair. I believe I have an amendment at the desk.

The Acting CHAIR. The Clerk will designate the amendment.

The text of the amendment is as follows:

Amendment No. 5 offered by Mr. Lynch:

At the end of title III, insert the following new section:

SEC. __X. CONFLICTS OF INTEREST IN CLEARING ORGANIZATIONS.

(a) Commodity Exchange Act.--

(1) DEFINITION OF RESTRICTED OWNER.--Section 1a of the Commodity Exchange Act (7 U.S.C. 1a) (as amended by the preceding provisions of this Act) is further amended by adding at the end the following:

``(51) RESTRICTED OWNER.--The term `restricted owner' means any swap dealer, security-based swap dealer, major swap participant, or major security-based swap participant, that is an identified financial holding company as defined in Section 1000(b)(5) of the Financial Stability Improvement Act of 2009, or a person associated with a swap dealer or a major swap participant that is an identified financial holding company, or a person associated with a security-based swap dealer or major security-based swap participant that is an identified financial holding company.''.

(2) CONFLICTS OF INTEREST.--

(A) Subparagraph (P) of section 5b(c)(2) of the Commodity Exchange Act (as added by the preceding provisions of this Act) is amended by adding at the end of such subparagraph the following: ``The rules of the derivatives clearing organization that clears swaps shall provide that a restricted owner shall not be permitted directly or indirectly to acquire beneficial ownership of interests in the organization or in persons with a controlling interest in the organization, to the extent that such an acquisition would result in restricted owners being entitled to vote, cause the voting of, or cause the withholding of votes of, more than 20 percent of the votes entitled to be cast on any matter by the holders of the ownership interests. The rules of the derivatives clearing organization shall provide that a majority of the directors of the organization shall not be associated with a restricted owner. This subparagraph shall not be construed to require divestiture of any interest of a restricted owner in an established and operational derivatives clearing organization acquired prior to January 1, 2010, provided that acquisitions by such restricted owner after such date shall be subject to this subparagraph. The Commission may determine whether any acquisition by a restricted owner during any interim period prior to the date of the enactment of this Act has been made for the purpose of avoiding the effect of this subparagraph.''.

(B) Section 4s(g)(1) of the Commodity Exchange Act (as added by the preceding provisions of this Act) is amended--

(i) by striking ``and'' at the end of subparagraph (C); and

(ii) by redesignating subparagraph (D) as subparagraph (E) and insert after subparagraph (C) the following:

``(D) the prevention of self-dealing, by limiting the extent to which such a swap dealer or major swap participant may conduct business with a derivatives clearing organization, a board of trade, or an alternative swap execution facility that clears or trades swaps and in which such a swap dealer or major swap participant has a material debt or equity investment; and''.

(C) Paragraph (12) of section 5h(d) of the Commodity Exchange Act (as added by the preceding provisions of this Act) is amended by adding at the end the following new subparagraph:

``(C) The rules of the swap execution facility shall provide that a restricted owner shall not be permitted directly or indirectly to acquire beneficial ownership of interests in the facility or in persons with a controlling interest in the facility, to the extent that such an acquisition would result in restricted owners being entitled to vote, cause the voting of, or cause the withholding of votes of, more than 20 percent of the votes entitled to be cast on any matter by the holders of the ownership interests. This subparagraph shall not be construed to require divestiture of any interest of a restricted owner in an established and operational swap execution facility acquired prior to January 1, 2010, provided that acquisitions by such restricted owner after such date shall be subject to this subparagraph. The Commission may determine whether any acquisition by a restricted owner during any interim period prior to the date of the enactment of this Act has been made for the purpose of avoiding the effect of this subparagraph.

``(D) The rules of the swap execution facility shall provide that a majority of the directors of the facility shall not be associated with a restricted owner.''.

(D) Section 5(d) of the Commodity Exchange Act (as amended by the preceding provisions of this Act) is further amended by striking paragraph (15) and inserting the following:

``(15) CONFLICTS OF INTEREST.--

``(A) The board of trade shall establish and enforce rules to minimize conflicts of interest in the decisionmaking process of the contract market, and establish a process for resolving any such conflicts of interest.

``(B) The rules of a board of trade that trades swaps shall provide that a restricted owner shall not be permitted directly or indirectly to acquire beneficial ownership of interests in the board of trade or in persons with a controlling interest in the board of trade, to the extent that such an acquisition would result in restricted owners being entitled to vote, cause the voting of, or cause the withholding of votes of, more than 20 percent of the votes entitled to be cast on any matter by the holders of the ownership interests. This paragraph shall not be construed to require divestiture of any interest of a restricted owner in an established and operational board of trade acquired prior to January 1, 2010, provided that acquisitions by such restricted owner after such date shall be subject to this paragraph. The Commission may determine whether any acquisition by a restricted owner during any interim period prior to the date of the enactment of this Act has been made for the purpose of avoiding the effect of this paragraph.

``(C) The rules of a board of trade that trades swaps shall provide that a majority of the directors of the board of trade shall not be associated with a restricted owner.''.

(b) Securities Exchange Act of 1934.--

(1) DEFINITION OF RESTRICTED OWNER.--Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) (as amended by the preceding provisions of this Act) is further amended by adding at the end the following:

``(78) RESTRICTED OWNER.--The term `restricted owner' has the same meaning as in section 1a(51) of the Commodity Exchange Act.''.

(2) CONFLICTS OF INTEREST.--

(A) Paragraph (10) of section 3C(d) of the Securities Exchange Act of 1934 (as added by the preceding provisions of this Act) is amended by adding after subparagraph (B) the following:

``The rules of the swap execution facility shall provide that a restricted owner shall not be permitted directly or indirectly to acquire beneficial ownership of interests in the facility or in persons with a controlling interest in the facility, to the extent that such an acquisition would result in restricted owners being entitled to vote, cause the voting of, or cause the withholding of votes of, more than 20 percent of the votes entitled to be cast on any matter by the holders of the ownership interests. The rules of the swap execution facility shall provide that a majority of the directors of the facility shall not be associated with a restricted owner. This paragraph shall not be construed to require divestiture of any interest of a restricted owner in an established and operational swap execution facility acquired prior to January 1, 2010, provided that acquisitions by such restricted owner after such date shall be subject to this paragraph. The Commission may determine whether any acquisition by a restricted owner during any interim period prior to the date of the enactment of this Act has been made for the purpose of avoiding the effect of this paragraph.''.

(B) Section 15F(g)(1) of the Securities Exchange Act of 1934 (as added by the preceding provisions of this Act) is amended--

(i) in subparagraph (C), strike ``and''; and

(ii) insert after subparagraph (C) the following (and redesignate the succeeding subparagraph accordingly):

``(D) the prevention of self-dealing by limiting the extent to which a security-based swap dealer or major security-based swap participant may conduct business with a clearing agency, an exchange, or an alternative swap execution facility that clears or trades security-based swaps and in which such a dealer or participant has a material debt or equity investment; and''.

(C) Section 6(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78f(b)) is amended by adding at the end the following new paragraphs:

``(10) The rules of the exchange minimize conflicts of interest in its decision-making process and establish a process for resolving such conflicts of interest.

``(11) The rules of an exchange that trades security-based swaps provide that a majority of the directors of the exchange shall not be associated with a restricted owner.

``(12) The rules of an exchange that trades security-based swaps provide that a restricted owner shall not be permitted directly or indirectly to acquire beneficial ownership of interests in the exchange or in persons with a controlling interest in the exchange, to the extent that such an acquisition would result in restricted owners being entitled to vote, cause the voting of, or cause the withholding of votes of, more than 20 percent of the votes entitled to be cast on any matter by the holders of the ownership interests. This paragraph shall not be construed to require divestiture of any interest of a restricted owner in an established and operational exchange acquired prior to January 1, 2010, provided that acquisitions by such restricted owner after such date shall be subject to this paragraph. The Commission may determine whether any acquisition by a restricted owner during any interim period prior to the date of the enactment of this Act has been made for the purpose of avoiding the effect of this paragraph.''.

(D) Section 17A(b)(3) of the Securities Exchange Act of 1934 (15 U.S.C. 78f(b)) is amended by adding at the end the following new subparagraphs:

``(J) The rules of a clearing agency that clears security-based swaps shall provide that a restricted owner shall not be permitted directly or indirectly to acquire beneficial ownership of interests in the agency or in persons with a controlling interest in the agency, to the extent that such an acquisition would result in restricted owners being entitled to vote, cause the voting of, or cause the withholding of votes of, more than 20 percent of the votes entitled to be cast on any matter by the holders of the ownership interests. This subparagraph shall not be construed to require divestiture of any interest of a restricted owner in an established and operational clearing agency acquired prior to January 1, 2010, provided that acquisitions by such restricted owner after such date shall be subject to this subparagraph. The Commission may determine whether any acquisition by a restricted owner during any interim period prior to the date of the enactment of this Act has been made for the purpose of avoiding the effect of this subparagraph.

``(K) The rules of the clearing agency shall provide that a majority of the directors of the agency shall not be associated with a restricted owner.''.

The Acting CHAIR. Pursuant to House Resolution 964, the gentleman from Massachusetts (Mr. Lynch) and a Member opposed each will control 5 minutes.

The Chair now recognizes the gentleman from Massachusetts.

Mr. LYNCH. I yield myself such time as I may consume.

Madam Chair, firstly, I would like to thank Chairman Frank, Chairman Peterson and also Chairman Waxman for their great work on this bill, and I want to thank those three chairmen for supporting this amendment.

My amendment addresses a fundamental problem in the derivatives industry, and it seeks to close a gap in the underlying legislation.

Madam Chair, what many Members of Congress and the public don't realize is that the U.S. derivatives market is about $605 trillion, which is more than five times the value of the stocks traded on the New York Stock Exchange.

More important than simply the scale of the derivatives industry is the fact that, according to the Comptroller of the Currency, a total of 97 percent of the derivatives trading in this country is controlled by just five banks. So it's a near monopoly. Four of those five banks were top recipients. During their recent financial meltdown, these same banks engaged in very risky behavior involving complex derivatives, which endangered the entire financial system. They had to be bailed out by the taxpayers. As a result of all of these banks--Citigroup, Bank of America, Goldman Sachs, JPMorgan, and Morgan Stanley--as well as major swap participants, such as AIG, they received $200 billion in taxpayer money.

The Wall Street Reform and Consumer Protection Act attempts to prevent that from happening again. The bill would require over-the-counter trading to be conducted through clearinghouses, which are set up to police derivatives trading and to make sure there is sufficient protection from the reckless behavior that these ``too big to fail'' banks have engaged in. Clearinghouses are a good idea. Think of them as financial police stations. That's the function they are intended to serve. Some describe them as a blast wall that will prevent the failure of a derivatives deal from impacting the real economy.

However, the problem is--and in my view, this is a huge problem with the bill--the bill would allow these same big banks to purchase the clearinghouses that are being created to police the big banks in their derivatives trading. The big banks would be allowed to own and control the clearinghouses and to set the rules for how their own derivatives deals are handled.

My amendment would prevent those big banks and major swap participants, like AIG, from taking over the police station--these new clearinghouses. It would do so by limiting to a 20 percent voting stake the ownership interest in those banks and the governance of the clearing and trading facilities. Essentially, by providing entry to the market, it would introduce competing commercial interests to bring competition and transparency to the derivatives industry and to keep those banks honest.

At this time, I reserve the balance of my time.

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