July 10, 2012  

Four Years After Crash, Pivotal Wall Street Reform Finalized

CFTC Finally Defines ‘Swap’ Derivatives, Enabling Stronger Regulation

 Washington, D.C.– With approval of the foundational rule on “swaps” today, the Commodity Futures Trading Commission (CFTC) finally can begin the important job of regulating this dangerous industry, Public Citizen said. The CFTC voted 4-1 on the definition of “swap” derivatives. This definition draws the line between swaps that will be regulated and those that won’t be. Swaps generally are agreements between two parties based on the changing price of a financial instrument or commodity.

“Weapons of mass financial destruction, as investment guru Warren Buffett called them, now are subject to an arms control treaty, if a modest one,” said Tyson Slocum, director of Public Citizen’s Energy Program.

As explained in a recent Public Citizen report, “Forgotten Lessons of Deregulation,” without question, industry exploited regulatory definitions of complex derivatives instruments in the Commodity Exchange Act.

“These complex contracts played a toxic, pivotal role in the financial crisis and the most expensive taxpayer bailout in history,” said Bartlett Naylor, financial policy advocate with Public Citizen’s Congress Watch division. “AIG escaped conventional regulation of its credit default swaps (CDS) owing to regulatory definition problems dating back to 1990, resulting in a bailout of $180 billion of taxpayer funds for clients such as Goldman Sachs.”

“In the new rule, the commission correctly restricts credit insurance to users who are protecting their credit investments,” said Naylor. “CDS became especially dangerous with multiple buyers of the same insurance, akin to 10 fire insurance policies on one house. If the house burns, the insurance company must pay off 10 times the value of the house.”

Though generally happy with the rule, Public Citizen does have some concerns.

“This rule falls short with energy markets,” said Slocum. “With progressive Commissioner Bart Chilton dissenting, the CFTC opened a big loophole to certain types of energy forward contracts, exempting them from reporting requirements entirely. The CFTC should deploy its full authority to police this crucial market.”

“Today’s rule does trigger the clock on position limits, a critical rule designed to limit the ability of firms to drive up commodity prices such as oil by cornering a larger market share,” said Slocum. “That rule, while far weaker than it should be, but still subject to an industry lawsuit, takes effect in two months.”

The CFTC final rule has not yet been finalized for the public.

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Public Citizen is a national, nonprofit consumer advocacy organization based in Washington, D.C. For more information, please visit www.citizen.org.