DATE:JUNE 4, 2009

TO:NCOIL LEGISLATORS

FROM:SUSAN NOLAN

NCOIL EXECUTIVE DIRECTOR

RE:SENATE HEARING ON REGULATORY REFORM OF CREDIT DEFAULT SWAPS AND OTHER DERIVATIVES

The following information is provided for your review:

Senate Committee Hearing/Testimony(6/4 U.S. Senate)

Tough Fight Ahead Seen for Derivatives Legislation (6/3 Marketwatch)

Earlier today, the U.S. Senate Committee on Agriculture, Nutrition & Forestry held a four-hour hearing entitled Regulatory Reform and the Derivatives Market to discuss a Commodity Futures Trading Commission (CFTC) reform proposal and to hear from key derivative market participants and interested parties. Members and panelists discussed proposed regulations of credit default swaps (CDS) and other derivatives, including mandatory clearing, the use of exchanges, standardized and tailored products, and capital and margin requirements, among other things.

SENATE COMMITTEE HEARING

MEMBER REMARKS

Committee Chair Tom Harkin (D-IA) said that:

the Committee will be taking action this year on legislation to regulate derivative markets

it was imperative to pass comprehensive and fundamental reform that would bring transparency and accountability to the marketplace

legislation that he is sponsoring would require all derivatives to be traded on regulated exchanges

Ranking Member Saxby Chambliss (R-GA):

agreed that the regulation of the derivatives markets is a critical issue that must be addressed

cautioned against regulatory measures that would be “too intrusive” or that would hamper private sector innovation

said that the economic slowdown makes the case for more market transparency

PANEL ONE—U.S. CFTC

CFTC Chairman Gary Gensler said that the Congress should enact broad reform to address the over-the-counter (OTC) derivative market and that the comprehensive framework should apply to all derivative dealers and all derivative products. Among other things, he said that regulation:

applied to derivative dealers should set capital standards, margin requirements, and business conduct standards and include recordkeeping and reporting requirements

applied to derivative markets should require the use of regulated exchanges, facilitate transparent trading, and permit real-time reporting of transactions

Q & A

The following noteworthy comments were made during the Q & A with Chairman Gensler:

Chairman Gensler said that the CFTC must coordinate with international regulators and foreign boards of trade to make sure there is not a regulatory race to the bottom.

Chairman Gensler said that the CFTC regulatory proposal would address both standardized derivatives and tailored derivatives.

Chairman Gensler—responding to a question regarding merging the CFTC and SEC—said that merger for merger’s sake would not accomplish much for the American public.

Sen. Ben Nelson (D-NE) defended state insurance regulation and distinguished between AIG insurance companies and AIG Financial Products—a federally regulated affiliate whose actions are largely considered to have caused the company’s downfall.

PANEL TWO—INTERESTED PARTIES

Witnesses included

Lynn Scott of the UCLA School of Law

Mark Lenczowski of J.P. Morgan Chase & Co

Dr. Richard Bookstaber on his own behalf

David Dines of Cargill Risk Management

Michael Masters of Masters Capital Management, LLC

Daniel Driscoll of the National Futures Association

The following noteworthy comments were made during the oral statements and/or the Q & A with the second panel:

Ms. Scott said that healthy economies regulate derivative markets and that derivative traders are very good at making up risks that they are “hedging” against.

Mr. Lenczowski said that all standardized OTC derivatives should be cleared and that enhanced reporting requirements should apply to all OTC products but cautioned against applying other regulatory standards in a one-size-fits-all philosophy.

Dr. Bookstaber called derivatives the “weapon of choice for gaming the system” and said that their complexity can hide risks and create unexpected linkages between markets.

Mr. Dines said that regulation should be risk-based and that regulatory changes for CDS would not be appropriate for all derivatives.

Mr. Masters supported requiring all OTC derivatives to be cleared through a regulated exchange.

Feel free to contact me by reply e-mail or at 518-687-0178 or Mike Humphreys at or at 202-220-3014 should you have any questions.