Six-point list to reduce excessive speculation, manipulation and systemic risk created by derivatives trading
Jun 18 2012
Washington—Senator Dianne Feinstein and 14 colleagues today sent a letter to federal financial regulators urging final implementation of the Dodd–Frank Wall Street Reform and Consumer Protection Act. The letter, sent to the top five federal regulators, offers a six-point to-do list that must be acted upon.
“Nearly four years after trading in derivatives markets brought the United States economy to its knees, and nearly two years after the Dodd-Frank Act passed, these critical market protections should be in place and in force—but they are not,” the senators write. “Recent multi-billion dollar losses in the derivatives markets, such as those occurring at JPMorgan Chase, have reminded us of why we needed to replace our failed derivatives regulatory regime. If this can happen to JPMorgan Chase, which prides itself on its risk management capability, it can happen elsewhere.”
The letter was sent to U.S. Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro, Commodities Futures Trading Commission Chairman Gary Gensler and Comptroller of the Currency Thomas Curry.
Joining Senator Feinstein on the letter are Sens. Carl Levin (D-Mich.), Maria Cantwell (D-Wash.), Tom Harkin (D-Iowa), Jack Reed (D-R.I.), Richard J. Durbin (D-Ill.), Bernie Sanders (I-Vt.), Jeff Merkley (D-Ore.), Barbara Boxer (D-Calif.), Frank R. Lautenberg (D-N.J.), Daniel K. Inouye (D-Hawaii), Patty Murray (D-Wash.), Richard Blumenthal (D-Conn.), Sherrod Brown (D-Ohio), Jim Webb (D-Va.).
Complete text of the letter sent to Treasury Secretary Geithner—which was also sent to the other four regulators—follows.
June 18, 2012
We are writing to ask that you, as the chairman of the Financial Stability Oversight Council, take stronger, faster action to implement the Dodd–Frank Wall Street Reform and Consumer Protection Act provisions designed to reduce excessive speculation, manipulation, and systemic risk created by trading in the $700 trillion derivatives market. Nearly four years after trading in derivatives markets brought the United States economy to its knees, and nearly two years after the Dodd-Frank Act passed, these critical market protections should be in place and in force—but they are not.
Recent multi-billion dollar losses in the derivatives markets, such as those occurring at JPMorgan Chase, have reminded us of why we needed to replace our failed derivatives regulatory regime. If this can happen to JPMorgan Chase, which prides itself on its risk management capability, it can happen elsewhere. With these failures fresh in our minds, we call on the Financial Stability Oversight Council to unite its efforts in order to implement the law aggressively in the following ways:
- Definitions: CFTC and SEC are scheduled to publish their definitions of swaps, security-based swaps, and other key terms from the Dodd-Frank Act this month, and any further delay of such a basic requirement is entirely unacceptable. A number of provisions essential to effective regulation of derivatives—including limits on excessive speculation, swaps dealer registration, and public real-time reporting—will not go into effect until these key terms are defined. It’s past time for the two year debate over definitions to end, and implementation of the law to begin.
- Limits on Excessive Speculation: CFTC has proposed limits on excessive speculation, but it has not yet begun to enforce them. The Dodd-Frank Act specifically required that these limits be imposed more than a year ago. It’s past time to enforce speculative position limits.
- Mandatory Clearing: Federal regulators have not yet identified any derivatives that must be cleared—even though CFTC Chairman Walter Lukken testified in 2008: “While wholesale regulatory reform will require careful consideration, centralized clearing is one immediate and proven solution that could help mitigate the risks associated with these (credit default swap) products.” It’s past time to implement the Dodd-Frank Act’s requirement that derivatives be cleared, when feasible.
- Transparent Markets: Federal regulators have not yet instituted transparent, real-time reporting of derivatives trading by American traders, both here and abroad. A lack of transparency left regulators in the dark regarding the size of JPMorgan Chase’s London Whale credit default swap positions—something that is simply unacceptable four years after AIG’s London trading unit prompted a record-breaking Federal bailout. It’s past time to require transparency and real-time reporting.
- Volcker Rule: The lack of Volcker Rule enforcement allowed JPMorgan Chase to bet FDIC insured deposits—guaranteed by the U.S. taxpayer—in a barely-regulated credit default swap market. The JPMorgan Chase losses also demonstrate that this rule must be strongly enforced, and it must include strict limitations on speculative trading and proprietary trading practices disguised as hedging or market-making. It’s past time to establish and enforce a strong Volcker Rule.
- Offshore Loopholes: And finally, London-based traders for AIG and now JPMorgan Chase lost billions of dollars on derivatives bets that had direct, negative consequences throughout their entire firms. AIG would have failed if not for hundreds of billions of dollars in taxpayer bailout funds. JPMorgan Chase has lost at least $2 billion and counting. The swaps booked in London often have a direct and significant effect on U.S. commerce, and the Dodd-Frank Act directed Federal regulators to oversee these trades if they have such effects. It’s past time to close these offshore loopholes.
A secretive, speculative marketplace is inefficient—rewarding traders at the expense of price discovery, price stability, and product costs for all Americans. We understand that regulating America’s financial markets is a difficult and complicated task, but this complexity can no longer be an excuse for failing to implement the law Congress passed nearly two years ago. It is simply unacceptable to not provide the financial markets with the oversight necessary to protect American businesses and families from the devastation of derivatives market failures.
Dianne Feinstein, United States Senator
Carl Levin, United States Senator
Maria Cantwell, United States Senator
Tom Harkin, United States Senator
Jack Reed, United States Senator
Richard J. Durbin, United States Senator
Bernie Sanders, United States Senator
Jeff Merkley, United States Senator
Barbara Boxer, United States Senator
Frank R. Lautenberg, United States Senator
Daniel K. Inouye, United States Senator
Patty Murray, United States Senator
Richard Blumenthal, United States Senator
Sherrod Brown, United States Senator
Jim Webb, United States Senator