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

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REP. BOB ETHERIDGE (D-NC): Thank you, Mr. Chairman.

Mr. Sirri, I wasn't here earlier, but I want to follow up what my friend Kansas touched, because he's touched on it and I want to follow a little further, because I'm sure you're familiar with Section 409 of the Federal Deposit Insurance Company's Improvement of '91, which was added in the Commodity Futures Modernization Act.

This section authorized multilateral clearing organizations -- whether under CFT, SEC or Fed oversight -- to clear over-the-counter derivatives. If over-the-counter derivatives magically become securities through clearing, why did Congress enact this provision into law? What's it for if that wasn't what it was about?

MR. SIRRI: I'm not sure I can answer why Congress did something, so I won't try to, but I will offer a comment on what I understand that to be. And I, again, am not an authority on fiducia.

But I understand a DCO to be able to, for example, under its terms clear securities and derivatives on securities. I understand that that's something that's permitted under it. We clearly have authority to clear securities. That's something that we've been doing since -- a long, long time; decades and decades and decades.

So the entity -- the provision of the DCO itself, because it allows that regime, it seems to me the point is that it can do it doesn't mean that it requires that other agencies not be part of the process. Were someone to elect to clear a security -- and equity -- it would be unusual for us to say, well, we won't do it.

I'm not sure -- and this would be something for Congress to answer; I couldn't answer it -- did Congress intend for equities to be cleared under the DCO regime? From the understanding of my staff members who understand this a lot better than I, their answer to me was no.

REP. ETHERIDGE: That might be a place we need to revisit.

Given that explanation, it seems to me you'd have to agree that other swaps can be standardized through the clearing process in the same manner; therefore, if counterparty credit risk is removed through clearing, wouldn't the thousands of energy over-the-counter swaps that are being cleared by ICE and NYMEX -- as we spoke about before -- in fact be futures contracts?

And by your reasoning, these energy swaps become standardized contracts for future delivery, and hence they are now subject to the full regulatory authority of the CFTC. Doesn't this analysis regarding credit default swaps result in this conclusion? If not, why not?

MR. SIRRI: I couldn't -- I can't help on a question with a comment to the CFTC authority. That wouldn't be a question for us.

REP. ETHERIDGE: Well, but given your last conclusion to your last answer, that's why I asked the question of you.

MR. SIRRI: I can come back to you after the fact and answer that, but that's too fine a question for me to parse right here. I understand --

REP. ETHERIDGE: Would you be kind enough to give us a written explanation of that, please?

MR. SIRRI: I'd be happy to do that.

REP. ETHERIDGE: Because I think gets to part of the heart of the question that we've been dealing with -- would you not agree?

MR. SIRRI: Well, I would think the one thing that I would observe here is the instruments for which we're discussing are, securities-base wise. In other words, my point was only to them. The point I was making was not to other things that don't implicate securities -- energy, as you brought up.

REP. ETHERIDGE: Well, but that gets to the point of that issue. So if you would be kind enough to give us a written explanation of that prior to the 15th, that would be great.

MR. SIRRI: I would be happy to do that.

REP. ETHERIDGE: Thank you.

I yield back, Mr. Chairman.

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