Harkin Measure Brings Financial Transactions onto Regulated Exchanges

Press Release

Senator Tom Harkin (D-IA) today introduced legislation to bring all over-the-counter financial transactions, those currently traded without federal oversight, onto regulated exchanges. The measure will establish stronger standards of openness, transparency and integrity in the trading of swaps and other over-the-counter financial derivatives as a critical step toward rebuilding and restoring confidence in the financial system.

Over the years, the Commodity Futures Trading Commission (CFTC) and laws enacted by Congress have allowed instruments that are essentially futures contracts to be privately negotiated without the safeguards provided through exchange trading. Yet the total face value of swaps reached a high of some $531 trillion at the middle of last year, eight and a half times the world GDP of $62 trillion, according to the latest figures available. Renowned investor Warren Buffett has called derivatives "financial weapons of mass destruction" if they are not properly understood and managed.

"In this economic downturn, we can no longer just sit back and let the markets work. Instead, we need to take a hard look at the contributing factors of this sagging economy," said Harkin. "By restoring reasonable safeguards and regulation of swaps, including credit default swaps, along with all futures contracts, this legislation will go a long way toward ensuring confidence in the markets and reestablishing soundness and integrity that the financial system needs. It will bring these transactions out into the sunlight where they can be monitored and appropriately regulated."

The Derivatives Trading Integrity Act will bring more transparency and accountability into the marketplace. Specifically, the bill amends the Commodity Exchange Act to eliminate the distinction between "excluded" and "exempt" commodities and transactions versus commodities and transactions traded or conducted on regulated exchanges. All commodities and transactions of the same nature would be treated the same.

In addition, the bill eliminates the statutory exclusion of swap transactions, and ends the CFTC's authority to exempt such transactions from the general requirement that a contract for the purchase or sale of a commodity for future delivery can only trade on a regulated board of trade. In effect, this means that all futures contracts must trade on a designated contract market or a derivatives transaction execution facility. Virtually all contracts now commonly referred to as swaps fall under the definition of futures contracts and function basically in the same manner as futures contracts.

Last fall, the Senate Agriculture Committee heard dramatic testimony about the impact of unregulated financial derivatives on the U.S. economy. Mr. Eric R. Dinallo, Superintendent of the State of New York Insurance Department , told the Committee "…it wasn't insider trading or late trading or off-balance-sheet transactions that hurt us. It wasn't firm regulation or soft regulation or strong enforcement or lax enforcement that apparently helped to blow up the global economy. It is what we chose not to regulate."

Senator Harkin has a history of raising questions about these contracts with federal officials. At a February 10, 2000 hearing of the Committee, Harkin, in his position as Ranking Member, asked then- Chairman of the Federal Reserve System Alan Greenspan and then-Secretary of the Treasury Lawrence Summers about the potential threats to the financial system from their proposal to deregulate financial swaps and over the counter derivatives.

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