Statements on Introduced Bills and Joint Resolutions

Floor Speech

STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS -- (Senate - September 22, 2009)

By Mr. REED:

S. 1691. A bill to comprehensively regulate derivatives markets to increase transparency and reduce risks in the financial system; to the Committee on Banking, Housing, and Urban Affairs.

Mr. REED. Mr. President, today I introduce the Comprehensive Derivatives Regulation Act of 2009, or the CDRA, which establishes for the first time a comprehensive regulatory framework to prevent derivatives trading activities from ever again contributing to catastrophic failures in our financial system. One year ago this month our nation found itself on the verge of a total financial meltdown with decades-old financial institutions collapsing overnight and credit markets freezing up in large part because companies like AIG took huge and risky bets selling totally unregulated credit default swaps, bets that backfired when the housing bubble burst.

Derivatives are financial contracts that investors use to manage their risks or grow their portfolios. They are called derivatives because they derive their value from other things such as the price of corn at a future date, or whether a company fails to make good on its debts. While most derivatives offer companies the ability to better manage their risks, some irresponsible financial firms took huge risks in recent years using new, untested, and unregulated derivatives products. When these firms faltered, it sent shockwaves through our financial system and landed us in a recession. As a result, today families in Rhode Island and throughout the country struggle to keep their jobs and stay in their homes.

I have been working over the past year with my Senate colleagues to develop a series of critical reforms to the financial sector to ensure that we never face such a perilous situation again. As the Chairman of the Securities, Insurance, and Investment Subcommittee of the Senate Banking Committee, I have introduced bills to greatly strengthen oversight of credit rating agencies and hedge funds, which until now have been subject to relatively little regulation.

Introducing the CDRA is another key step in filling the huge regulatory gaps in our financial system. This bill would put in place a truly comprehensive framework for regulating all such products. Derivatives have been overseen by two market regulators, the Securities and Exchange Commission, SEC, which has broad responsibility for protecting investors and ensuring the integrity of securities markets, and the Commodity Futures Trading Commission, CFTC, which regulates commodity futures and the exchanges on which those products are traded.

In part because of this shared jurisdiction, large segments of the derivatives markets, such as credit default swaps, have gone entirely unsupervised by either agency. This bill will fill these regulatory gaps.

First, the bill would require standardized credit default swaps and other unregulated derivatives to be traded through a clearinghouse. This would protect the companies and the financial system from the risks posed by these instruments. Importantly, the bill also grants regulators the ability to oversee any new derivative product in the future, so dealers can no longer create products that fall into holes in the law.

Second, the bill establishes robust capital and margin requirements for derivatives dealers and other major market participants, and subjects them to higher standards for products that are not traded on clearinghouses.

Third, the bill subjects firms to new conduct requirements to protect investors from abusive practices in the market. It also includes new recordkeeping and reporting requirements to ensure that regulators and investors have broad information about derivatives transactions and positions throughout the financial sector.

Fourth, the bill combats fraud and manipulation in derivatives markets by giving regulators new authority to set position limits and oversee the marketing of products to certain investors. The bill strengthens thresholds in place to ensure only sophisticated investors are engaging in certain types of trading.

Finally, the bill rationalizes the sharing of jurisdiction between the SEC and CFTC, and establishes a process for quickly assigning responsibility for new products so they do not fall through the cracks. Specifically, the bill provides the SEC with jurisdiction over all derivatives that are securities or can be used as synthetic substitutes for securities, because without such authority over products that can affect securities markets, the SEC cannot accomplish its mission to protect investors and ensure the integrity and fairness of markets. The bill provides the CFTC with jurisdiction over all other derivatives. The bill also provides a fast and efficient process for the U.S. Court of Appeals for the District of Columbia Circuit to resolve any differences in views between the agencies that might arise.

I hope my colleagues will join me in improving the oversight of credit default swaps and other derivatives products by cosponsoring this legislation and supporting its passage.

Mr. President, I ask unanimous consent that the text of the bill be printed in the Record.

There being no objection, the text of the bill was ordered to be printed in the Record, as follows:

S. 1691

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