- Senate Agriculture Committee Holds Hearing on Financial Market Regulation
- December 3, 2009
- Law Firm: Alston & Bird LLP - Atlanta Office
On Wednesday, the Senate Committee on Agriculture, Nutrition and Forestry held a hearing entitled “Reforming U.S. Financial Market Regulation.” Testifying at the hearing were:
- Gary Gensler, Chairman, Commodity Futures Trading Commission (CFTC)
- Glenn English, Chief Executive Officer, National Rural Electric Cooperatives
- Neil Schloss, Treasurer, Ford Motor Company
- Mark Boling, Executive Vice President & General Counsel, Southwestern Energy Company
- Jeff Billings, Manager of Risk Management, Municipal Gas Authority of Georgia on behalf of the American Public Gas Association
- Robert Johnson, Director of Economic Policy, The Roosevelt Institute, on behalf of the Americans for Financial Reform
CFTC Chairman Gensler explained that the CFTC has two goals for financial market regulation: promoting transparency and lowering risk. In order to make the markets more transparent, Chairman Gensler recommended that:
- All standardized derivative transactions should be moved onto exchanges or trade execution facilities. Although some end users may be exempted from clearing and margin requirements under the new regulation, these end users should still be brought onto a trading platform.
- All customized, non-cleared transactions should be reported to a trade repository so that a regulator can see these transactions.
- Data on OTC derivatives transactions should be aggregated and made available to the public. The CFTC currently collects large trader position data and releases it to the public, and it should apply similar standards to OTC derivatives.
- There should be stringent record keeping and reporting requirements for swap deals, with an audit trail. Regulators also should have the authority to set aggregate position limits in the OTC markets.
In order to lower market risk, Chairman Gensler recommended that:
- Standard OTC transactions should be cleared by regulated central counterparties. Gensler stated that all clearable transactions should be required to be brought to a clearinghouse, regardless of what type of entity is on either side of the trade.
- Swap dealers and participants should be regulated for capital.
- Swap dealers should be required to post and collect margin for individual transactions.
- Regulators should be able to mandate robust business conduct standards.
Committee Chairman Blanche Lincoln (D-AR) asked Gensler who should make the determination as to what is standardized or “clearable”—the regulator or the clearinghouses. Gensler replied that the SEC and CFTC need clear authority to determine that contracts are standard enough to be cleared, and need to have the goal of getting as many to contracts cleared and onto transparent trading venues as possible. He also stated that it would be important for market participants to know whether or not a transaction would be “clearable” before entering into such a transaction.
Lincoln also asked whether Gensler was comfortable with Treasury’s proposed definition of “major swap participants,” and asked whether the term would capture all of the institutions that need to be covered by the regulation. Gensler replied that he believed that the term would be broad enough to capture numerous institutions, but would not pick up end users.
Ranking Member Saxby Chambliss (R-GA) stated that end users do not believe that the benefit of clearing is worth the expense of posting margin, and Gensler assured him that, for exempted end users, the dealer would be the one required to post margin, and that dealers are large financial institutions with access to the necessary liquidity to post margin. End users could then have secured or unsecured credit arrangements with the dealer. Gensler also said that he hopes that Congress will not grant any exemption from margin requirements to hedge funds or similar entities.
Several committee members had concerns relating to the international nature of financial markets regulation, and asked whether stringent regulation in the United States would drive market participants to other markets around the world. Gensler stated that the majority of the financial sophisticated markets are in the United States and Europe, and that the major world players had all indicated their intent to implement similar legislation. He stated that the United States needed to be a world leader on this issue, but that other countries had indicated that they would cooperate.
The second panel focused on end users and their concerns. The witnesses generally supported Chairman Gensler’s statements regarding the need for stronger, more transparent markets, but they expressed concerns. Several of the witnesses emphasized the need for margin exemptions for end users. Also, the witnesses wanted to ensure that any proposed legislation will distinguish between different classes of derivatives. They noted that end users are bona fide hedgers, and use derivative contracts to mitigate real market exposures. These end users generally do not enter into credit default swaps or other complex derivatives contracts. The witnesses asked for more stringent regulation to be implemented on the riskier, more complex types of derivative contracts that are more likely to be used for speculation and less likely to be used to hedge against real market exposure.