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Doesn't anyone remember 1929 and what happens with the use of excess
leverage.
By Will Acworth, BridgeNews
Washington--June 29--A comprehensive
overhaul of U.S. futures laws passed an
important hurdle Thursday, when the Senate
Agriculture Committee gave the bill its unanimous
approval. However, changes made to the bill's
language on swaps--necessary for Democratic
support--will cause problems for Sen. Phil
Gramm, R-Texas, chairman of the Senate
Banking Committee.
* * *
The bill, S. 2697, seeks to streamline the
regulation of U.S. futures exchanges, improve
the legal framework for derivatives traded over
the counter, and eliminate a ban on the trading
of futures on individual stocks. The House is
working on a similar bill, H.R. 4541, which passed
the House Agriculture Committee on Tuesday
and is headed next to the House Commerce and
Banking committees.
At Thursday's vote, Democrats and Republicans
expressed strong support for the bill and praised
Sen. Richard Lugar, R-Ind., the committee's
chairman and the architect of the bill, for making
a series of last-minute changes to address
various concerns raised by lawmakers and
government regulators.
Sen. Bob Kerrey, D-Neb., said he would urge the
Democratic leadership to support the bill when it
comes to the Senate floor, and several members
said they hoped the strength of the support for
the bill in committee would give the bill enough
momentum to pass the Senate before the fall
elections.
However, the bipartisan support came at a big
price. Sen. Gramm, a co-sponsor of the bill with
Lugar, wanted to make sure that the OTC
derivatives market would be free of interference
not only from the Commodity Futures Trading
Commission, but also from the Securities and
Exchange Commission. Lugar agreed to this
during the initial drafting of the bill but was
forced to step back in order to move the bill
through his committee.
After the vote, Lugar explained to reporters that
he discussed this issue intensively with the
Federal Reserve, the Treasury Department and
Gramm's staff before removing Gramm's language
from the bill. Lugar went instead with a
compromise that essentially postpones debate
on this issue.
Rather than excluding the SEC from the OTC
derivatives market, the bill simply confirms that
the SEC gains no jurisdiction over this market
and calls for a study by the President's Working
Group on Financial Markets before anything
further is done.
That group consists of the heads of the Fed,
Treasury, the SEC and the CFTC. Sen. Tim
Johnson, D-S.D., a member of both the Senate
Banking and Agriculture committees, called this a
"wise and thoughtful approach," a sentiment that
seemed to be shared by other Democrats as well
as the SEC. Lugar candidly admitted to reporters
afterward that without this change, he would
not have been able to marshal a majority for the
bill, " and that would have been the end of the
process."
"We have tried to maintain a consensus-building
situation that in the case of most senators has
lead to their cooperation and their participation
and their affirmative statements," Lugar said.
The danger now is that Gramm may oppose the
bill because of this change. In fact, several
industry observers--including both supporters
and opponents--told BridgeNews after the vote
that this move substantially reduces the odds
that the bill will pass this year. Some said they
thought Gramm would try to bring the bill to his
committee and reverse this change, but others
said they expected a fight on the Senate floor
instead.
As part of Thursday's vote, Lugar's panel made
changes to several other parts of the bill. To
address concerns raised by the CFTC and some
committee members, the bill now provides a
"codified exemption" for OTC derivatives based
on energy products, thereby preserving the
CFTC's anti-manipulation authority in this area.
Lugar also made several changes to the section
of the bill dealing with single-stock futures,
specifically to the provisions dealing with
margins, enforcement, foreign stock indexes and
suitability. End [Begin BridgeLinks]
Will Acworth, Bridge News, Tel: 202-220-3751
Send comments to futures@xxxxxxxxxx
[End BridgeLinks]
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