Harkin bill would reform trading of swaps and other financial derivatives

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 that 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 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 they are necessary because they feel speculators grew dominant in crude oil futures markets and drove prices above $150/bbl this past summer.

Harkin said that the total face value of swaps reached a peak of approximately $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 which 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. 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," Harkin said.

He said that 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 tat 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 which now are commonly referred to as swaps fall under the definition of futures contracts and function in the same basic manner, he said.

Contact Nick Snow at [email protected]