On October 14, 2008, during a public hearing held by the Senate Committee on Agriculture, Nutrition and Forestry (the “Committee”), which regulates the Commodity Futures Trading Commission, to discuss the role played by financial derivatives in the ongoing financial crisis, the Chairman of the Committee, Senator Tom Harkin of Iowa, placed partial blame for the current financial crisis on “the extensive commerce in credit default swaps (“CDS”) and similar contracts.” Senator Harkin’s statement is consistent with his prior criticisms of financial swaps and over-thecounter financial derivatives.

An alternative viewpoint on the impact of financial derivatives in the ongoing financial crisis was presented at the hearing by Robert Pickel, the Chief Executive Officer of the International Swaps and Derivatives Association (“ISDA”).1 Despite such testimony, Senator Harkin announced at the conclusion of the hearing that he will be introducing new legislation to amend current laws in order to force CDS and other derivatives onto regulated exchanges. Specifically, he stated, “[o]ver-thecounter derivatives need to be traded on a regulated exchange so that we know who, how much, what the values are, and that they have to answer a call once or twice a day to make sure they have got the money to back it up.” Senator Harkin’s bill is still in the drafting stage, and the specifics of the proposed legislation (including the types of derivatives to be covered) are currently unavailable.

Under the Commodity Futures Modernization Act of 2000 (the “CFMA”), most types of derivatives entered into between “eligible contract participants” currently have the benefit of an exclusion from regulation by the Commodity Futures Trading Commission. The announcement by Senator Harkin raises the possibility that the scope of the exclusion for derivatives under the CFMA may be eliminated or restricted to certain derivative product types. Senator Harkin’s comments indicate that CDS are likely to be subject to regulation under the proposed legislation, and he further suggested that the proposed legislation may encompass other derivatives, including interest rate swaps in the municipal market. The loss of the regulatory exclusion could force derivative trading onto designated or registered clearing houses or derivatives clearing organizations that are intended to eliminate the principle-to-principle credit risk of over-the-counter derivatives trading with a third-party guarantee of the clearing organization.

In addition to the announcement by Senator Harkin, as well as the recent announcement by the New York State Insurance Department regarding the future regulation of CDS2, Charlie McCreevy, the European Union’s financial services commissioner, today called for further review and possible regulation of the EU CDS market.