This week, Rep. Collin C. Peterson (D-MN), Chairman of the House Agriculture Committee, released a discussion draft of legislation tentatively entitled “Derivatives Markets Transparency and Accountability Act,” which would, among other important reforms, ban naked credit-default swaps (CDSs). Under the proposed bill, protection buyers would be required to hold the underlying instrument before engaging in CDS transactions. Currently, the CDS market is estimated at around $29 trillion, but only in about 20% of the transactions does the protection buyer actually hold the underlying instrument. The proposed bill would also require all OTC transactions be cleared through designated clearing organizations, impose new limitations on the activities of foreign boards of trade, require more robust reporting of market data, subject OTC transactions to more stringent recordkeeping requirements, and require the CFTC to set appropriate position limits for all commodities, If passed, this bill would drastically change the shape of the CDS market. Peterson hopes to hold hearings on the proposed bill next week.
The derivatives industry has reacted negatively to the bill. International Swaps and Derivatives (ISDA) Chairman Shirvani stated that “the bill would increase the cost and reduce the availability of essential risk management tools while failing to address the true causes of the credit crisis.” In a press release, ISDA noted that CDSs “have remained available and liquid” throughout the current financial crisis and that “impairing their use would be counterproductive to efforts to return the credit markets to a healthy, functioning state."
Lawmakers and organizations alike have focused heavily on derivatives recently. The National Conference of Insurance Legislators also targeted naked credit-default swaps this week, and CFTC Commissioner Chilton called on Congress to regulate CDS and other OTC derivatives. Furthermore, Senator Harkin introduced a bill earlier this month which would require all OTC derivative transactions to be traded on regulated exchanges.