WASHINGTON - The Senate Agriculture Committee chairman said yesterday that he plans to soon introduce legislation that would authorize and require the federal government to regulate derivatives.
The proposed legislation, by Sen. Tom Harkin, D-Iowa, stems from the financial crisis that some lawmakers have blamed on credit default swaps, which comprise a massive, unregulated portion of the derivatives market.
It would mandate that derivatives agreements be traded on a regulated exchange "so that we know the value of the contracts, who is trading, and if they have enough assets to back the contract."
"Without proper regulations, trading in swaps is nothing more than casino capitalism," he said.
Though the legislation aims to regulate CDS, Harkin suggested it would encompass other derivatives, including interest-rate swaps in the municipal market.
But Kate Cyrul, a Harkin spokeswoman, said the bill is still being drafted and added, "I'm not sure we have that level of specificity."
One municipal market participant said yesterday that it would be difficult to trade municipal derivatives on a central exchange because they are tailored to each municipal issuer. In contrast, he said, CDS are much more standardized.
Congressional sources said that the legislation would likely give regulatory control of derivatives to the Commodity Futures Trading Commission, which is overseen by Harkin's committee. However it is unclear if other committees would agree to give the committee sole jurisdiction over these contracts.
The bill would have to amend a portion of the Commodity Futures Modernization Act of 2000 that formally excludes swaps from regulation and led to the development of independent clearing houses, according to Mark Ruddy of Ruddy Law Office PLLC here.
He added that the legislation would "in all likelihood" force the derivative business to those clearing houses, which provide a third-party guarantee on derivatives transactions, unlike most current over-the-counter transactions, which are subject to principle-to-principle credit risk.
Several regulators, including Securities and Exchange Commission chairman Christopher Cox, have urged Congress to consider providing regulators with the authority to regulate the $55 trillion notional market in credit default swaps. New York Insurance superintendent Eric Dinallo and CFTC commissioner Bart Chilton have made similar calls.
Harkin's remarks came a day after Robert Pickel, chief executive officer of the International Swaps and Derivatives Association, said in testimony before the committee that CDS have been unfairly blamed for causing the financial crisis.
"Both the role and effects of CDS in the current market turmoil have been greatly exaggerated," Pickel said. "To say that CDS were the cause, or even a large contributor, to that turmoil is inaccurate."
A House panel heard similar testimony yesterday.
