A key federal regulator is asking lawmakers to tighten legislation imposing broad new oversight on derivatives by going beyond the Obama administration's proposal in several areas governing the complex financial instruments blamed for hastening the global economic crisis.
Gary Gensler, chairman of the Commodity Futures Trading Commission, urged changing the measure to eliminate exemptions from new requirements for foreign-currency swaps and small firms dealing in derivatives, among other things.
In a letter to committee leaders in the House and Senate, Gensler said that while the administration proposal will go a long way toward reducing risk and bolstering the transparency and integrity of the $600 trillion derivatives market, "I believe the law must cover the entire marketplace without exception. ... The administration and Congress have an historic opportunity to repair shortcomings in our regulatory system."
"While we sh ould address the causes of past crises, we must also use this opportunity to predict and prevent the failures that could cause the next crisis," Gensler wrote.
His letter, dated Monday, was sent to Sen. Tom Harkin, D-Iowa, chairman of the Senate Agriculture Committee, and Sen. Saxby Chambliss of Georgia, the panel's senior Republican, as well as the leaders of the House Agriculture Committee, the Senate Banking Committee and the House Financial Services Committee.
Harkin said he welcomed Gensler's suggestions, with "the most important" being those that eliminate exemptions for certain types of swaps.
Congress is currently in summer recess. But Rep. Barney Frank, D-Mass., chairman of the Financial Services Committee, and Rep. Collin Peterson, D-Minn., head of the House Agriculture Committee, recently announced an agreement on guidelines for legislation to regulate derivatives, a proposal closely resembling the administration's plan, and said the House could vote on a bill next month.
In his letter, Gensler said, for example, that excluding foreign-currency swaps from the new restrictions as the White House bill proposes is overly broad and could enable dealers to structure other swaps transactions in a way to skirt regulation.
The Obama plan is designed to bring transparency to, and prevent manipulation in the sprawling, unregulated derivatives market. Credit default swaps, a form of insurance against loan defaults, account for an estimated $60 trillion of that market. The collapse of the swaps brought the downfall of Wall Street banking house Lehman Brothers Holdings Inc. and nearly toppled American International Group Inc. last fall, prompting the government to support the insurance conglomerate with about $180 billion in aid.
The value of derivatives hinges on an underlying investment or commodity - such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.
The Obama plan, sent to Congress last week, defines types of derivatives broadly in a way it says will be "capable of evolving with the markets."
Gensler noted in his letter that the CFTC and its staff helped the Treasury Department develop the legislation.
Under the proposal, the big investment banks that trade the derivatives would be subject to requirements for holding capital reserves against risk and other rules. A new network of clearinghouses would be established to provide transparency for trades in credit default swaps and other derivatives. All so-called "standardized" derivatives would be required to go through clearinghouses and to be traded on regulated exchanges or electronic trading systems.
But, Gensler said, an exception for firms that aren't swaps dealers or major swaps market participants "excludes a significant class of end users" from the mandatory clearing and trading requirements, and "may undermine th e policy objective of lowering risk."
"I welcome (Gensler's) suggestion for stronger requirements for clearing and exchange trading of swaps than is in the proposal from Treasury," Harkin said in a statement Wednesday.