U.S. Senators Saxby Chambliss (R-Ga.), Ranking Member of the Senate Agriculture Committee, Richard Shelby (R-Ala.), Ranking Member of the Senate Banking Committee, and Judd Gregg (R-N.H.), Ranking Member of the Senate Budget Committee, today introduced legislation aimed to improve the derivatives title of the financial regulation bill currently before the Senate. The senators said the current derivatives portion of the bill will have unintended consequences for Main Street businesses and consumers who are already struggling in this weakened economy.
"The legislation we introduced today will provide significant new regulatory authorities for the Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) over derivatives," said Sen. Chambliss. "Our legislation appropriately targets new regulations so that Wall Street is properly regulated without punishing the businesses that had nothing to do with the market collapse in the first place. We believe our amendment offers a commonsense approach to these complex instruments without overreaching and I encourage my colleagues to support our legislation."
"There is broad bipartisan consensus that we must end the casino-like atmosphere on Wall Street," said Sen. Shelby. "The Democrats' derivatives legislation, however, is a carelessly-crafted bill that would not give the regulators the tools they need to monitor and rein in abusive activities, but would undermine the safe and legitimate use of derivatives for risk management activities by Main Street businesses across this country. These companies had nothing to do with the financial crisis, yet under the Democrats' plan, they would face higher costs and more limited options for managing their risks. The effects will be evident in the form of higher prices for consumers, slower economic growth, and more job losses. I am pleased to join with Senators Chambliss and Gregg in offering this constructive alternative that will rein in Wall Street abuses, while ensuring that Main Street businesses remain competitive."
Sen. Gregg stated, "The derivatives title currently contained in the Dodd bill fails to accomplish any meaningful reforms and will do significant harm to Main Street businesses, American workers, and our nation's competitiveness. At a time when our country is still struggling to recover from a difficult recession, it makes absolutely no sense to blindly support economic policies that would force jobs and capital overseas. We must create an environment that fosters transparency and accountability in the derivatives market through mandated reporting, stronger prudential oversight of market participants, and greater use of central clearing. It is critical that we also do this in a way that does not force these products out of American banks and financial institutions, sending this $600 trillion market overseas. The amendment that I, along with 12 of my Republican colleagues, have proposed will ensure that the derivatives title actually accomplishes its intended aim. Our amendment will ensure transparency in the over-the-counter derivatives market and allow banks in the United States to continue to use these instruments so that businesses on Main Street have access to credit and are able to create jobs."
The legislation is cosponsored by Sens. Robert Bennett (R-Utah), Thad Cochran (R-Miss.), John Cornyn (R-Texas), Mike Crapo (R-Idaho), Mike Johanns (R-Neb.), Kay Bailey Hutchison (R-Texas), Mitch McConnell (R-Ky.), Pat Roberts (R-Kan.), John Thune (R-S.D.), and David Vitter (R-La.).
Key Provisions of the Amendment:
Transparency - All swap transactions will be made known to the appropriate regulators, so that effective regulation can be applied where necessary. Combined with the additional authorities described below, the regulators will have the necessary tools to police these markets for fraud and manipulation. Additionally, there will be public dissemination of prices and volumes of completed swap transactions in order that investors and other market participants might be assisted in marking existing swap positions to market, making informed decisions before executing future transactions, and assessing the quality of transactions they have executed.
Clearing Requirement - The Federal Reserve Board of Governors, the CFTC and the SEC will establish criteria for identifying which swap transactions should be required to clear. The CFTC or the SEC (depending on the type of swap) will then use the criteria and the data made available through new transparency requirements to identify which swaps are subject to the new mandated clearing requirement.
Regulation of Swap Participants - Those entities holding the bulk majority of all swap transactions would be required to register with the appropriate regulator, comply with business conduct standards and clear any trades identified by the regulators as being subject to the clearing mandate described above. This category of swap dealers, large hedge funds, Federal Home Loan Banks, Freddie Mac, Fannie Mae and AIG-type entities would be known as "swap participants". We are seeking to ensure that those entities most likely to contribute to a failure of the U.S. financial system are closely monitored, conducting their dealings in a responsible manner, and transferring significant risk off of their books and into a regulated clearinghouse.
Treatment of End Users - End user entities who utilize swaps to reduce or offset risk inherent to their business would not be required to clear their transaction, thereby avoiding the additional costs of clearing. This practice is defined as a "bona-fide hedging swap transaction" and is based on the CFTC's existing definition of what constitutes a bona-fide hedge.
Margin - As appropriate to their defined responsibilities, the CFTC or the SEC would have the ability to apply margin requirements to non-cleared transactions entered into by "swap participants". This would not apply to transactions involving end users unless their "swap participant" counterparty reaches a substantial net uncollateralized swap position. In order to help protect the financial integrity of the clearinghouses, the regulators may also issue rules relative to margin requirements of the clearinghouses. Finally, to protect counterparty collateral, initial margin for both cleared and non-cleared swap transactions would be subject to new segregation requirements.
Foreign Exchange Swaps, Forwards and Options - Foreign exchange forwards, swaps, and options will not be subject to the clearing requirement unless the Department of the Treasury and the Board of Governors determine that such a requirement is appropriate after considering whether there is an effective settlement system for such products.
Position Limits - In order to limit speculative activity in the commodity markets and preserve their intended function, the CFTC will have authority to aggregate position limits on transactions executed on exchange as well as those conducted bi-laterally over-the-counter. This is vast new authority.