Yesterday, the House Committee on Agriculture held a second hearing to review the role of credit derivatives in the U.S. Economy. Witnesses at the hearing included:
Panel: Mr. Ananda Radhakrishnan, Director, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission. Mr. Patrick M. Parkinson, Deputy Director, Division of Research and Statistics, Board of Governors of the Federal Reserve System. Mr. Erik R. Sirri, Director of Division of Trading and Markets, Securities Exchange Commission. Mr. Eric R. Dinallo, Superintendent, State of New York, Insurance Department.
In yesterday’s hearing, committee members appeared to form a consensus around a central clearing platform as a solution for the troubled credit default swap market. Chairman Collin Peterson (D-MN) suggested an immediate move to “start opening up and cleaning up the swaps markets” by using a CFTC model of a “transparent and above-board central clearing process.” Ranking Member Bob Goodlatte (R-VA) agreed, stating that “a clearing mechanism for credit default swaps” will “improve transparency and risk management” and will “create a method for price discovery.”
Mr. Radhakrishnan of the CFTC testified that the Federal Reserve, the SEC and the CFTC have promised to work together on the review and creation of any proposed clearing agency. He also pledged to work “with international regulators, to bring transparency and financial integrity to the CDS market…and to enhance and improve effective risk management and market oversight.”
Mr. Erik Sirri of the SEC, who testified in the Committee’s first hearing on the subject, continued to emphasize the role that a central clearing platform could play in reducing systematic risk. Sirri highlighted the need for “specific controls on market-wide concentrations that cannot be implemented effectively when counterparty risk management is uncoordinated.” He also criticized the current statutory framework which prohibits the SEC from regulating the over-the-counter derivatives market.
New York State Insurance Superintendent Eric Dinallo also testified, announcing that his department plans to “indefinitely delay” their plan to regulate certain kinds of credit default swaps. The New York Insurance Department announced this plan in late-September. Mr. Dinallo indicated that the recent cooperation between the SEC, CFTC and the Federal Reserve is the primary reason for this delay.
The cooperative tone of the hearing was markedly different from the Committee’s previous hearing in October 15, 2008. Chairman Peterson intends to hold future hearings to address the regulation of credit default swaps if necessary.