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New Bill Would Regulate Futures Swaps, OTC

Chairman Tom Harkin (D-IA) of the Senate Committee on Agriculture, Nutrition and Forestry, continuing his drive to impose more accountability into the financial market, has introduced a bill to establish stronger standards of openness, transparency and integrity in the trading of swaps and other over-the-counter financial derivatives by bringing them all into the regulatory fold.

"My bill will end the unregulated 'casino capitalism' that has turned the swaps industry into a ticking time bomb," Harkin said in introducing the Derivatives Trading Integrity Act Thursday. The bill would make the Commodity Futures Trading Commission (CFTC) the super regulator of all futures transactions and include all swaps, derivatives and over-the-counter (OTC) trades in the regulatory and reporting framework.

Specifically, the bill amends the Commodity Exchange Act to eliminate the distinction between "excluded" and "exempt" commodities and regulated, exchange-traded commodities; futures contracts for all commodities would be treated the same. Credit default swaps are the primary targets of the legislation, but the measure would encompass financial deals involving energy, agriculture and metals, as well.

The bill would eliminate the CFTC's authority to exempt such transactions from the general requirement that a contract for the purchase or sale of a commodity for future delivery can only trade on a regulated board of trade. In effect, this means that all futures contracts must trade on a designated contract market or a derivatives transaction execution facility. Virtually all contracts now commonly referred to as swaps fall under the definition of futures contracts and function basically in the same manner as futures contracts.

Harkin's agriculture committee has held several hearings on financial market problems and vowed greater funding and oversight authority for the CFTC (see NGI, June 16). The senator pointed to the size of the unregulated swaps market where the total face value of swaps reached a high of some $531 trillion for the middle of this year -- eight and a half times the world gross domestic product of $62 trillion.

"It is long past time for accountability in the markets. The economic downturn in this country is forcing us to examine all contributing factors to the crisis in our financial markets," said Harkin. "By restoring reasonable safeguards and regulation of swaps, including credit default swaps, along with all futures contracts, this legislation will go a long way toward ensuring confidence in the markets and reestablishing soundness and integrity that the financial system needs."

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