WASHINGTON ¬– Today Sen. Susan Collins, R-Maine, and Sen. Carl Levin, D-Mich., introduced legislation to give federal financial regulators immediate authority to regulate trillions of dollars in swap transactions that continue to be marketed and traded in the United States without adequate government oversight. The Authorizing the Regulation of Swaps Act would repeal statutory prohibitions that currently bar government regulation of swap markets, including credit default swaps.
“Public confidence in our nation’s financial system has been shaken badly by the financial meltdown,” said Senator Collins. “As a former Maine financial regulator, I am convinced that significant regulatory reforms are required to restore public confidence and to ensure that lack of regulation does not allow such a crisis in the future. The current structure of our financial system lacks much needed reporting and transparency requirements in the swaps market, which many experts believe helped contribute to the current financial crisis.”
Sen. Collins continued: “The consequences in our country have been dire: falling home prices, rising foreclosure rates, plunging consumer sales, increased unemployment, and a tremendous erosion of retirement savings. While local credit unions and small community banks are subject to safety-and-soundness regulation, enormous Wall Street financial institutions that have a far greater impact on our economy have not been subject to such regulation. This legislation would clear the way for federal financial regulators to oversee the swaps market. It is a critical component of the overall reform needed to restore confidence in our financial regulatory system.”
“Multi-trillion-dollar unregulated swaps markets are going full bore without government oversight or authority to protect taxpayers from risk,” said Sen. Levin. “Hundreds of billions of taxpayer dollars have already been spent on AIG and others that got in over their head on swaps while regulators’ hands were tied. Taxpayers ended up paying the bill. Our legislation would take the first step to reduce risk by removing statutory barriers and giving federal regulators clear authority to put a cop on the beat in swaps markets. Congress ought to put those cops on the beat right now, without waiting for a possible comprehensive financial reform bill later this year.”
Swaps are typically an agreement between two parties placing a bet on future cash flows. Some swaps bet on whether a stock price, interest rate, commodity price, or currency value will rise or fall; others bet on whether a company will default on payment of a bond. Stock price bets are referred to as equity swaps; bets on whether companies will pay their debts are referred to as credit default swaps.
According to the latest data compiled by the Bank of International Settlements, as of June 2008, worldwide swaps markets included credit default swaps with a total notional value of $57 trillion; commodity swaps with a notional value of $13 trillion; equity swaps with a notional value of $10 trillion; foreign currency swaps with a notional value of $62 trillion; and interest rate swaps with a notional value of $458 trillion.
The bill would remove statutory barriers and allow immediate regulation of all types of swap agreements. The prohibitions to be repealed by the bill were first enacted in the Commodity Futures Modernization Act of 2000, a complex bill that was slipped into a large appropriations bill, without notice, during the last days of the 106th Congress.
Last fall, then-SEC Chairman Christopher Cox called on Congress to take “swift action” to overturn the legal ban on regulating credit default swaps. Even some past opponents of regulating swaps now support federal regulation. For example, former Securities and Exchange Commission (SEC) Chair Arthur Levitt recently said it was a mistake not to have regulated swap agreements. Former Treasury Secretary Robert Rubin said that derivatives, which include swaps, “create systemic risk.” Former Federal Reserve Chairman Alan Greenspan said last October that “serious problems” are associated with credit default swaps.
Top officials in the Obama Administration, including Treasury Secretary Tim Geithner, National Economic Council Director Larry Summers, SEC Chair Mary Schapiro, and Gary Gensler, nominee to head the CFTC, have all called for stronger regulation of over-the-counter transactions, including swap agreements.
Sens. Collins and Levin call the bill an “interim measure intended to clear the way for more specific swaps requirements” in financial reform legislation which could come later this year. They note that the bill would not specify how swaps should be regulated, but would simply provide authority to act.
“Taxpayers are now on the hook for hundreds of billions of dollars in bailouts for companies that engaged in unregulated swaps,” Levin said. “This legislation can bring transparency, accountability, and stability to financial markets that are badly in need of all three, and where government oversight is now prohibited by laws proven to have been a mistake.”
Repeal Existing Prohibitions on Regulating Swaps. The bill would repeal over a dozen provisions in existing law, including in the Commodity Futures Modernization Act of 2000, which prohibit federal financial regulators from regulating swap agreements.
Authorize the Regulation of Swaps. The bill would give authority to federal financial regulators, including bank, securities and commodities regulators, to oversee and regulate all types of swap agreements, including credit default, commodity, equity, interest rate, and foreign currency swaps. Those regulators could no longer use as an excuse for not regulating swaps the prohibitions which exist in current law. The bill uses the same definition of swaps that is used in current law to prohibit swaps regulation, and would authorize federal oversight and regulation of all exchange-traded and over-the-counter swap agreements, without exception.
Require Consistent Treatment of Swaps. The bill does not require federal regulators to regulate swap agreements -- it merely authorizes such regulation and removes the statutory barriers in place since 2000. Nor does the bill provide any direction to federal regulators on how to regulate swaps other than to require them to consult, work, and cooperate with each other to promote consistency in the treatment of swap agreements.
Establish Interim Authority. By removing existing statutory prohibitions and providing federal financial regulators with authority to oversee and regulate swaps, the bill would eliminate harmful statutory barriers, give regulators immediate interim authority over multi-trillion-dollar swaps markets, and clear the way for more specific swaps requirements in subsequent comprehensive financial reform legislation later this year.