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Project on Government Oversight

New Report on Financial Regulatory Reform Highlights Derivatives Loopholes

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March 8, 2010

Last week, the Roosevelt Institute hosted a conference on financial regulatory reform with a panel of experts including Joseph Stiglitz, Simon Johnson, and Elizabeth Warren, among others. The conference coincided with the release of the Institute’s new report, Make Markets Be Markets – Step 1: Restoring the Integrity of the U.S. Financial System.

POGO is still reading through the report, but couldn’t help but notice that there’s an entire section dedicated to the regulation of over-the-counter (OTC) derivatives written by Professor Michael Greenberger, the former Director of Trading and Markets at the Commodities Futures Trading Commission (CFTC) under Brooksley Born. Over the past few months, POGO has been raising concerns about some potential loopholes in Congress’s legislation to overhaul the regulation of OTC derivatives, including one that would create an “alternative swap execution facility” with much weaker requirements for transparency and disclosure.

POGO was pleased to see Professor Greenberger highlight this provision as one of three “deregulatory measures” that “crept into the House bill.” Here’s his take on it:

Swaps Execution Facility. First, while the bill continues to require that swaps not otherwise exempt must be exchange traded, at the behest of Wall Street lobbyists, the exchange trading requirement can be satisfied by placement of a privately executed swap on a “swaps execution facility,” which includes electronic trade execution or voice brokerage. While the electronic trade must be conducted by an entity “not controlled” by the counterparties, if the “SEF will not list the contract, it does not have to be executed.” In other words, the swap does not need to be exchange traded if it is submitted to a swaps execution facility that will not trade the swap. Pursuant to vigorous Wall Street lobbying, this SEF (introduced in House Agriculture Committee mark up) appears to undercut completely the bill’s and the Obama Administration’s exchange trading requirement. The provision for the SEF must be removed from any bill addressing the regulation of derivatives and swaps.

POGO hopes the Senate keeps this recommendation in mind as it puts the finishing touches on its version of the bill. Click here to read the rest of the report (the section on derivatives starts on page 99).

Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO’s investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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