The House Agriculture Committee held a hearing this morning on:
Hearing to Review Implementation of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act
Here is Ranking Committee Member, Congressman Collin Peterson’s opening statement, from this Hearing this morning, that touches on the now-recognized issue of end users and derivative pricing transparency:
“Derivatives played a key role in the collapse of our financial markets. We had an over $600 trillion OTC derivatives market with no oversight, no transparency, and with no regulation. As a consequence of this and many other factors, the American taxpayer ended up having to bail out large financial institutions like AIG when the financial system fell apart.
“Even before the financial crisis, nearly three years ago, this Committee was looking into these markets and we tried to address some of these issues in early 2009. Many of the provisions this Committee adopted with bipartisan support were ultimately included in the Dodd-Frank bill.
“Mandatory clearing of over-the-counter swaps and requiring major swap participants and swap dealers to back up their swap deals with additional capital should help ensure that taxpayer dollars will not be needed to rescue these large financial firms again and bring greater stability to the swaps marketplace.
“The Committee focused closely on ensuring that under these new rules end users could continue using derivatives to hedge the risks associated with their underlying business, whether it is energy exploration, manufacturing or other commercial activities. End users did not cause the financial crisis; they were the victims of it.
“We worked to see that mandatory clearing, mandatory trading, new capital and margin requirements, and other obligations fell upon the financial players responsible for the crisis and not upon commercial end users. Proper oversight by this Committee will ensure that our efforts are implemented by the regulators.
“The provisions of Dodd-Frank will also increase transparency to better arm end users when negotiating with the big banks. Commercial end users generally get the worse end of any swap deal because they simply do not have the same level of information on swap prices and terms as do their dealer counterparties. By requiring the big dealers to report and clear more of their swaps and move into more transparent marketplaces, commercial end users will be able to get a better picture of the swaps market and be better armed in their negotiations with these dealers.
“Unfortunately, there is still a lot of confusion and misinformation out there with regard to commercial end users. I hope this hearing gives us an opportunity to clear some of that up. Because if implemented properly, the derivative title of Dodd-Frank could prove to be a major benefit to commercial end users.
Time will tell if the OTC derivatives clearlng houses make the most sense. The Derivative Project still believes regulated exchanges are in the best interest of our economy and the end user.