Senate Agriculture Committee Chairman Tom Harkin, D-Iowa, introduced a bill Thursday, the Derivatives Trading Integrity Act, which will designate the Commodity Futures Trading Commission as the regulator with jurisdiction over all futures contracts. The legislation will test the level of demand by putting contracts on a regulated exchange to see how the market responds and open the market to make sure anyone can get in on the trading.
"This bill aims to bring more transparency and accountability into the marketplace," Harkin said. "It eliminates the distinction between excluded and exempt commodities and regulated exchange traded commodities. Futures contracts for all commodities would be treated the same. In addition the bill eliminates the statutory exclusion of swap transactions."
That means that in the future every swap and derivative would have to be traded on a regulated exchange. Harkin says over the years the CFTC and Congress allowed the swaps industry to deal in futures contracts privately without any transparency that comes with exchange trading, which has developed into a dangerous situation.
During a hearing held by the Senate Agriculture Committee last month, Terence Duffy, the executive chairman of the Chicago Mercantile Exchange, told the committee that the lack of price transparency and the failure to properly measure and collateralize the risk of those instruments in the over the counter markets that has had dire consequences. In contrast, trading of financial futures on regulated futures markets, subject to the oversight of the CFTC, has been a net positive to the economy. According to Duffy it has caused no stress to the financial system and has easily endured the collapse of one and near collapse of two firms that were very active in the market.
"My bill will end the unregulated, as I call it "casino capitalism" that has turned the swaps industry into a ticking time bomb," Harkin said. "We'll bring them into the sunlight where we can monitor them, have them regulated, where the exchanges can stipulate certain margin requirements if needed and where everyone will know exactly what is going on."
With the adjournment of Congress, nothing will be done on the bill this year, but Harkin wanted to get it out there to test the waters on it and see what kind of reaction it gets. Harkin plans to reintroduce it when the Senate reconvenes on Jan. 6, 2009.