Policy Letter

POGO OpposesLloophole in Derivatives Overhaul Legislation

Chairman Collin Peterson

House Committee on Agriculture

1301 Longworth House Office Building

Washington, DC 20515

Ranking Member Frank Lucas

House Committee on Agriculture

1305 Longworth House Office Building

Washington, DC 20515

Dear Chairman Peterson and Ranking Member Lucas:

The Project On Government Oversight (POGO) is writing to you today to express our strong objection to Chairman Peterson's amendment to the Peterson Substitute for H.R. 3795, the Over-the-Counter Derivatives Markets Act of 2009.

POGO is an independent nonprofit that investigates corruption and other misconduct in order to achieve a more effective, accountable, open, and ethical federal government. As such, POGO has a keen interest in ensuring that the nation's financial regulatory regime is capable of protecting the financial system from the types of risky and secretive transactions that brought our economy to the brink of collapse.

The consequences of acquiescing to an unregulated and secretive over-the-counter (OTC) derivatives market became painfully clear last fall, when AIG nearly went under after it was suddenly forced to post collateral on its credit default swaps, and had to be bailed out with billions of dollars in government assistance.

We recognize that legislation approved by your Committee would begin to address these concerns by, for instance, creating new rules for margin and capital requirements. Unfortunately, the definition of an "alternative swap execution facility" described in Chairman Peterson's amendment creates a wholly unjustified loophole in the regulation of OTC derivatives, effectively undermining the spirit of your legislation and representing a giant step backwards for transparency and accountability.

Journalist Andrew Cockburn has provided a clear and concise analysis showing how Chairman Peterson's amendment creates this dangerous loophole.[1] Under this amendment—which was adopted by voice vote with little debate—an "alternative swap execution facility" is simply defined as anything that "facilitates" swap trades. Such a facility would not be subject to the requirements of an actual exchange, thereby avoiding the new requirements for increased transparency and accountability. The specific authorization of voice brokerages is singularly troubling since it permits dealers to set prices that are not publicly disclosed.

We believe that the creation of this loophole is contrary to the avowed purpose of the bill. It will inevitably lead to the same kind of trading that created the financial crisis; it will undermine the transparency requirements that are needed to protect the public from fraud and manipulation; and it is inconsistent with confining financial trading, to the greatest extent possible, to well-regulated clearing houses.

We strongly urge the defeat of this amendment. If you have any questions or need additional information, please contact me at (202) 347-1122.


Danielle Brian

Executive Director

Project On Government Oversight

cc: House Committee on Financial Services

Senate Committee on Banking, Housing, and Urban Affairs

Senate Committee on Agriculture

1. Andrew Cockburn. "The Crafting of a Loophole." Counterpunch. November 11, 2009. http://www.counterpunch.org/andrew11112009.html (Downloaded December 2, 2009)