US Senate Agriculture, Nutrition, and Forestry Committee Chairman Thomas Harkin (D-Iowa) introduced legislation on Nov. 20 to reform the trading of swaps and other over-the-counter financial derivatives.
Harkin said his bill was designed to establish stronger standards of openness, transparency, and integrity in derivatives over-the-counter trading as a critical step toward rebuilding confidence in the US financial system.
Congressional efforts to regulate derivatives trading more closely could matter to oil and gas producers, petroleum refiners and marketers, and natural gas utilities because reforms could affect their ability to use financial hedges. Several congressional leaders believe reforms are necessary because they say speculators grew dominant in crude oil futures markets and drove prices above $150/bbl this past summer.
Harkin said the total face value of swaps reached a peak of about $531 trillion by mid-year, eight and a half times the world’s $62 trillion gross domestic product. Congress and the US Commodity Futures Trading Commission have accommodated the swaps industry over the years by allowing instruments that are essentially futures contracts to be privately negotiated without safeguards provided by trading on regulated exchanges, he maintained.
“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 re-establishing soundness and integrity that the financial system needs,” Harkin said. “My bill will end the unregulated ‘casino capitalism’ that has turned the swaps industry into a ticking time bomb, and it will bring these transactions out into the sunlight where they can be monitored and appropriately regulated,”
He said his bill would specifically amend the Commodities Exchange Act to eliminate the distinction between “excluded” and “exempt” commodities on one hand and regulated commodities on the other. Essentially, all contracts for futures, options, and other commodities would be treated the same, he said.
The bill also would eliminate the statutory exclusion of swap transactions and end the CFTC’s authority to exempt such transactions from the general requirement that a contract for purchase or sale of a commodity for future delivery can trade only on a regulated board of trade, according to Harkin. Virtually all contracts that now are commonly referred to as swaps fall under the definition of futures contracts, and they function in the same basic manner, he said.
