A Big Derivatives Loophole?

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Rep. Collin Peterson (D-Minn.), the chair of the House Agriculture committee, is sponsoring an amendment to his own legislation that’s supposed to regulate derivatives, the often-complex financial products that many people believe bear some of the blame for the financial crisis. Well, the guy who’s regulating derivatives knows best how to improve that regulation, right? Not according to the Project on Government Oversight, a Washington watchdog group, which has written a damning letter to Peterson arguing that his amendment would actually blow a big loophole in the rules. Here’s an excerpt:

The consequences of acquiescing to an unregulated and secretive over-the-counter (OTC) derivatives market became painfully clear last fall, when AIG nearly went under after it was suddenly forced to post collateral on its credit default swaps, and had to be bailed out with billions of dollars in government assistance.

We recognize that legislation approved by your Committee would begin to address these concerns by, for instance, creating new rules for margin and capital requirements. Unfortunately, the definition of an “alternative swap execution facility” described in Chairman Peterson’s amendment creates a wholly unjustified loophole in the regulation of OTC derivatives, effectively undermining the spirit of your legislation and representing a giant step backwards for transparency and accountability.

Journalist Andrew Cockburn has provided a clear and concise analysis showing how Chairman Peterson’s amendment creates this dangerous loophole. Under this amendment—which was adopted by voice vote with little debate—an “alternative swap execution facility” is simply defined as anything that “facilitates” swap trades. Such a facility would not be subject to the requirements of an actual exchange, thereby avoiding the new requirements for increased transparency and accountability. The specific authorization of voice brokerages is singularly troubling since it permits dealers to set prices that are not publicly disclosed.

We believe that the creation of this loophole is contrary to the avowed purpose of the bill. It will inevitably lead to the same kind of trading that created the financial crisis; it will undermine the transparency requirements that are needed to protect the public from fraud and manipulation; and it is inconsistent with confining financial trading, to the greatest extent possible, to well-regulated clearing houses.

A House committee using an unrecorded voice vote to approve an industry-supported amendment that guts its own—already weak—legislation: just another day on Capitol Hill.

HERE ARE THE FACTS:

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ONE MORE QUICK THING:

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As we wrote over the summer, traffic has been down at Mother Jones and a lot of sites with many people thinking news is less important now that Donald Trump is no longer president. But if you're reading this, you're not one of those people, and we're hoping we can rally support from folks like you who really get why our reporting matters right now. And that's how it's always worked: For 45 years now, a relatively small group of readers (compared to everyone we reach) who pitch in from time to time has allowed Mother Jones to do the type of journalism the moment demands and keep it free for everyone else.

Please pitch in with a donation during our fall fundraising drive if you can. We can't afford to come up short, and there's still a long way to go by November 5.

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