DATE: JANUARY 30, 2009

TO: NCOIL LEGISLATORS

FROM: MIKE HUMPHREYS, NCOIL

RE: CONGRESSIONAL BILL WOULD BAN “NAKED” CREDIT DEFAULT SWAPS

Below, please find links to the following information:

  • U.S. Draft Law Would Ban Most Trading in Credit Swaps (1/29 Bloomberg)
  • Summary of Draft Legislation Regarding Commodities Trading/Credit Default Swaps (Rep. Peterson Staff)
  • Draft Legislation Regarding Commodities Trading/Credit Default Swaps (Rep. Peterson)

This week, Congressman Collin Peterson (D-MN), Chair of the U.S. House Committee on Agriculture, circulated draft legislation that would ban “naked” credit default swaps (CDS)—or swaps where an investor does not own an underlying bond. The Agriculture Committee will hold hearings on Tuesday (February 3) and Wednesday (February 4) to discuss the bill draft.

NCOIL ACTIVITY

As you know, the NCOIL Steering and Financial Services & Investment Products Committees held a public hearing on the regulation of the CDS market last Saturday, January 24. The Financial Services Committee will meet to discuss the hearing and an NCOIL position on CDS regulation on February 28, in conjunction with the NCOIL Spring Meeting.

We have made outreach efforts to House Agriculture Committee staff and have provided links and other information regarding NCOIL CDS efforts.

LEGISLATION

The bill, which has not yet been introduced and does not have a number, will be titled the Derivatives Markets Transparency and Accountability Act of 2009. The draft has been designed “to bring greater transparency and accountability to commodity markets, and for other purposes.”

Regarding the CDS market, the draft states, “It shall be unlawful for any person to enter into a credit default swap unless the person would experience financial loss if an event that is the subject of the credit default swap occurs.”

It defines a CDS as “a contract which insures a party to the contract against the risk that an entity may experience a loss of value as a result of an event specified in the contract, such as a default or credit downgrade. A credit default swap that is traded on or cleared by a registered entity shall be excluded from the definition of a security as defined in this Act and in section 2(a)(1) of the Securities Act of 1933 or section 3(a)(10) of the Securities Exchange Act of 1934, except it shall be deemed a security solely for purpose of enforcing prohibitions against insider trading in sections 10 and 16 of the Securities Exchange Act of 1934.”

Among other things, the draft requires:

  • public reporting and record keeping of all over-the-counter transactions (OTC) for commodities
  • all OTC transactions to be cleared through a CFTC-regulated clearing organization
  • the Commodity Futures Trading Commission (CFTC) to propose a rule to define and classify index traders and swap dealers and set reporting requirements, and to publicly provide market data
  • reports from the CFTC on the effects of potential position limits on OTC trading, and from the Government Accountability Office (GAO) on an international regulatory regime for energy commodity futures and derivatives trading

BACKGROUND

The House Agriculture Committee has broad jurisdiction, including over the CFTC, futures market regulation, crop insurance, bioterrorism, renewable energy, rural development, disaster assistance, conservation, and animal and plant health, among other things.

The Committee held several hearings toward the end of 2008 to investigate the CDS market and credit derivatives more broadly, and heard from several of the witnesses who also participated in the January 24 NCOIL hearing.

Please feel free to contact me by reply e-mail or at 202-220-3014 should you have any questions.