Today, U.S. Senator Maria Cantwell (D-WA) announced her support for the final version of the financial regulatory reform legislation because of tough new regulations of derivatives added in final conference negotiations. Cantwell said the final bill contained significant improvements over the original Senate bill, which she opposed, particularly in its language requiring transparency in derivatives markets and tough penalties for evading the clearing and exchange trading requirements for derivatives. Cantwell today received written assurance from Gary Gensler, chairman of the Commodity Futures Trading Commission, that the bill "explicitly requires that swap dealers, major swap participants and financial entities use a clearinghouse for standardized or "clearable' derivatives transactions." The bill includes a narrowly-crafted exemption that will allow legitimate commercial end-users -- farmers, airlines, and manufacturers -- to continue to hedge business risks without being subject to the clearing and exchange trading requirements. But Gensler wrote that the legislation imposes strong oversight over the vast majority of derivatives trading. The full text of Gensler's letter is available here.
"I will vote in support of the conference report because it makes great strides toward our ultimate goal: bringing all standard derivatives onto exchanges and clearinghouses, with aggregate position limits and strong anti-manipulation tools," Senator Cantwell said. "Since even before the financial crisis of fall 2008 I have been fighting to bring the $600 trillion derivatives market out of the dark, unregulated betting hall where it has existed and into the bright light of transparency and regulation. This legislation is not perfect, and I will continue to push for even bolder action -- including a return to the Glass-Steagall separation of commercial and investment banking -- to reign in Wall Street, put an end to the concept of "too-big-to-fail.' But this bill makes significant strides toward preventing the kind of financial meltdown that we saw in the fall of 2008."
The bill contains three strengthening provisions added to the reform bill by the conference committee that were essential to securing Cantwell's vote.
Enforcement of Mandatory Clearing
In the legislation passed by Senate, clearing and exchange trading were without true enforcement capabilities. Clearing and exchange trading would have been optional, leaving the $600 trillion derivative market in the dark. The conference committee adopted Senator Cantwell's proposal making it unlawful to trade swaps without meeting the clearing requirement. The committee also adopted Cantwell's suggestions for additional enforcement authorities, making it mandatory for the regulators to write rules to prevent evasion of the clearing requirement, and doubling the penalties for knowing or reckless violation of the clearing laws. As a result of these changes, we now have a strong mandatory clearing and exchange trading requirement.
Aggregate Position Limits
In the legislation passed by the Senate, regulators were required to set aggregate position limits across all exchanges, but the limits were too easily evaded because of the opportunity for speculators to avoid the limits by purchasing multiple types "like contracts" -- similar swaps and commodity contracts -- to circumvent the limits.
The conference report mandates aggregate position limits across all exchanges -- foreign and domestic -- for commodity contracts and all economically equivalent contracts that could be used to speculate in a particular commodity, so speculator can't evade the rules by trading "like contracts" on different exchanges. The conference report directs the CFTC to use position limits to diminish, eliminate, or prevent excessive speculation, disrupt market manipulation, and ensure price discovery is not disrupted. These key improvements will stop speculators from driving up the price of oil and other commodities, creating a more stable price environment for American businesses.
Closing the Foreign Boards of Trade Loophole -- the "London Loophole"
In the legislation passed by the Senate, foreign boards of trade were still allowed to operate without registering with the CFTC and allowed to escape full regulation. This made the position limits and other key provisions meaningless.
The conference committee adopted an amendment by Senator Dianne Feinstein, which Cantwell cosponsored in the Senate, to fully close the London loophole by giving the CFTC authority to require registration of Foreign Boards of Trade that provide direct access to U.S. customers. Closing this loophole will prevent billions of dollars in speculative trading from driving up U.S. prices, as they did with oil prices in the summer of 2008. That means lower prices for U.S. business and consumers.
"All together, these provisions achieve a great deal of what I set out to do to regulate the $600 trillion derivative market," Cantwell said.