The Dodd-Frank Act included important reforms of the derivative market. Nearly three years after passage of the Act, Congress is now considering amendments. I’m testifying this week on the derivatives reform amendments before the U.S. House of Representatives in opposition of several of the amendments as a reversal of the needed reform.
Title VII of the Dodd-Frank Act mandates important changes in U.S. derivative markets, but many of these changes are not yet fully implemented. As Americans remain threatened by the same dangers that exploded on the country in 2008, Congress should consider ways to encourage and enable the full implementation of the Dodd-Frank derivative reforms.
Five of the seven legislative proposals being considered by this Subcommittee — which are the focus of the current hearing — take us in the opposite direction. They reverse key elements of the reform, resurrecting the old system in which major segments of the derivatives markets are off-limits to the cop on the beat. They reinstate the old system in which the cop’s discretion and authority is severely limited, while at the same time financial players are given greater license and more loopholes.
Before the 2008 financial crisis, the OTC swaps marketplace was unregulated and unsupervised. This was in contrast to futures exchanges, which also trade in derivatives, but within a longstanding regulatory framework and with supervision by the CFTC and SEC. A significant portion of the derivatives trade migrated to the OTC swaps marketplace in a classic example of regulatory arbitrage.
The Dodd-Frank Act mandated an end to this, imposing supervision on all derivative trades and establishing standards for transparency and clearing for much of the trade on the OTC swaps marketplace. I tie the proposed amendments to the history of lobbying to shelter derivatives trading from regulation.