October 7, 2009
Gary Gensler, the top regulator of the commodities markets, sees the U.S. financial system still “vulnerable” to the murky world of privately negotiated derivatives. As chairman of the U.S. Commodities Futures Trading Commission (CFTC), Gensler wants to comprehensively oversee the trading of these complex financial contracts for the first time. While some forms of derivatives are traded on regulated exchanges, federal regulators including Gensler, who was appointed by President Obama in December, have almost no power over derivatives that are traded privately on the phone or electronically. This over-the-counter derivatives market, which internationally is valued at nearly $600 trillion, is blamed for compounding the current financial crisis. “We stay particularly vulnerable because we haven’t filled the [regulatory] gaps,” Gensler told the Huffington Post Investigative Fund in an interview this week. WATCH: Although derivatives are intended to hedge risk or act like insurance on an underlying asset, they also can be used to speculate on prices. Credit default swap derivatives, some of which insured toxic mortgage-backed securities, drove the financial tailspin of the insurance giant AIG. Since last year’s calamity, the nation’s five largest commercial banks have become even more exposed to derivatives, to the tune of almost $200 trillion, according to a recent report by the U.S. Comptroller of the Currency. Those five banks–JPMorgan Chase, Goldman, Bank of America, Citibank and Wells Fargo– hold about 97 percent of all derivatives in the U.S. banking industry, the report said. The agency that Gensler heads was created in 1974, primarily to oversee futures contracts based on commodities such as wheat or oranges. When the instruments expanded beyond commodities, the CFTC lacked the authority and staff to intervene. Gensler now wants that authority, although his agency is hard-pressed to meet its demands. CFTC staff remains at 580, the same number the agency had at its inception. The CFTC computer system that oversees markets also is outdated. “We don’t have enough people to oversee the 200,000 transactions that happen every day in this marketplace,” he said in the interview. Gensler, 51, wasn’t always so gung-ho about derivatives oversight. When he was an assistant treasury secretary in the Clinton administration, Gensler helped design the very law that prevents the CFTC from regulating over-the-counter derivatives. Before joining Treasury in 1997, he had an 18-year career at Goldman Sachs, where he was a partner. He later was a senior advisor to Sen. Paul Sarbanes (D-MD), then-chairman of the Senate Banking Committee, while the post-Enron corporate responsibility and accounting reform known as the Sarbanes-Oxley Act was crafted. Gensler also was an adviser to Hillary Clinton’s presidential campaign and later Obama’s. Gensler has now become one of the strongest voices calling for derivatives regulation. Perhaps even more than Obama. Less than a week after Obama unveiled a plan for derivatives regulation, Gensler sent his own recommendations to Congress. He added 20 pages of regulations intended to “improve” Obama’s plan. The highlights of Obama’s plan include requirements for standardized derivatives to be traded on a regulated exchange or similar facility and to pass through clearinghouses that serve as a backstop if one party defaults. The plan also mandates increased capital and margin requirements for those trading more customized or non-standardized derivatives and increased transparency of all derivatives by making public some trading details. Gensler identified several loopholes in Obama’s plan, noting that it would exclude foreign exchange swaps from regulation, possibly encouraging swap dealers to tailor products to fit this foreign exclusion. “These exceptions could swallow up the regulation,” Gensler said in his package to Congress. At a House Financial Services Committee hearing today, Gensler was vocal about gaps in the committee’s derivatives regulation bill, which is widely regarded as being looser than either Obama or Gensler’s plan. The committee is expected to vote on the bill next week.
Read the full article →
October 3, 2009
By Dawn Kopecki Oct. 3 (Bloomberg) — Legislation tightening oversight of the $592 trillion over-the-counter derivatives market would give regulators authority to ban so-called abusive swaps. The Securities and Exchange Commission and Commodity Futures Trading Commission would get the power to “prohibit transactions in any swap” that regulators determine “would be detrimental to the stability of a financial market or of participants in a financial market,” according to a 187-page draft measure released yesterday by House Financial Services Committee Chairman Barney Frank . Opaque financial products, including some derivatives, have contributed to almost $1.6 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Among fallen companies are Lehman Brothers Holdings Inc., the investment bank that filed for bankruptcy, and insurer American International Group Inc., which has been surviving on government loans. “Lacking and lagging regulation of OTC derivatives was a major contributing factor to last year’s crisis, including the highly leveraged credit-default swaps at AIG that prompted government intervention,” Representative Melissa Bean , an Illinois Democrat who serves on Frank’s committee, said in an e- mailed statement. The legislation offered by Frank, a Massachusetts Democrat, would require the most common and actively traded over-the- counter derivatives contracts to be bought and sold on exchanges or processed through a regulated trading platform. ‘Clear Window’ “We can’t effectively protect American consumers — and make sure they are paying fair prices for food, gas and other commodities — unless we have a clear window into the trading that affects commodity pricing,” Bart Chilton , a CFTC commissioner, said in a statement that described Frank’s proposal as helping “to move this discussion down the road.” The measure also would give the Treasury Department the final say if the SEC and CFTC couldn’t agree on joint regulations, including setting position limits or the treatment of products that are economically similar, such as stock options and stock futures. A three-page proposal released by Frank in July would have given that power to a new Financial Services Oversight Council. Derivatives are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. Credit-default swaps are derivatives that were created primarily to protect lenders and bondholders from company defaults. Some lawmakers and regulators have said they may have been used to spread false rumors about financial companies to drive down stock prices. ‘Naked’ Swaps Frank’s proposals stopped short of barring “naked” credit-default swaps, where the buyer doesn’t own the underlying asset being hedged. The lawmaker had said he was considering such a ban. The draft by Frank won praise from potential opponents in the New Democrat Coalition. The group, which includes Bean and describes itself as moderate and “pro-growth,” had offered competing legislation that would have given Treasury veto power over regulations enacted by the SEC and the CFTC. “Chairman Frank’s draft provides a solid start to discussions about reforming the derivatives market,” said Representative Michael McMahon , a New York Democrat who was lead sponsor of the competing measure. To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.com .
Read the full article →
