Frank Sees Significant Expansion of Derivatives Regulation

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter.

House Financial Services Committee Chairman Barney Frank, D-Mass., said Congress will be “significantly expanding” the regulation of derivatives, an area of the financial services industry that saw explosive growth over the past decade.

“Where we have instruments, activities, entities that are an important means to gathering the funds that our private sector economy needs to do productive activity, we need to protect that. We need to make sure it’s done with integrity,” Frank told a joint hearing of the House Financial Services Committee and the House Agriculture Committee on July 10.

Rep. Spencer Bachus, R-Ala., ranking member of the House Financial Services Committee, cautioned against creating any implication that because the government is going to regulate derivatives, it will also provide a backstop. Taxpayers, Bachus warned, must not be forced to shoulder the burden of an over-the-counter (OTC) derivatives market gone bad.

Meanwhile, Treasury Secretary Tim Geithner told members that establishing a comprehensive framework of oversight for the OTC derivative markets is crucial to laying the foundation for a safer, more stable financial system. Geithner said the complexity of the derivatives instruments that emerged in recent times “overwhelmed the checks and balances of risk management and supervision, weaknesses that were magnified by systemic failures in judgment by credit rating agencies.” These failures, Geithner said, enabled a substantial increase in leverage both within and outside of the banking industry.

The administration’s plan, Geithner noted, would provide for strong regulation and transparency of all OTC derivatives, regardless of their reference asset, and regardless of whether the derivative is customized or standardized. Furthermore, the plan calls for strong supervision and regulation of all OTC derivatives dealers and all other major participants in the OTC derivative markets.

Geithner added that the administration intends to send Congress draft legislation that provides for a clear allocation of oversight authority between the Securities and Exchange Commission and the Commodities and Futures Trading Commission.