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46341

Harkin would re-regulate derivatives and swaps

Pledging to end what he calls "casino capitalism," Senator Tom Harkin (D-IA) Thursday introduced a bill that would place all derivatives and swaps under the regulation of the Commodity Futures Trading Commission.

"Futures contracts for all commodities would be treated the same," Harkin said.

Over-the-counter futures contracts, which were deregulated in the 1990s, would have to be traded on a regulated futures exchange. Some derivatives have played a role in the financial meltdown which has worsened the current U.S. and global recession.

Harkin said that he doesn't expect Congress to take up the bill until next year and he has not sought co-sponsors in the Senate.

When asked if he thought that U.S. legislation banning unregulated derivatives might force the business offshore, Harkin said he expects the U.S. to work with other countries to pass similar legislation.

"This is a global crisis and we have to have a global response to it," he told Agriculture Online during a telephone press conference.

Harkin said that an estimated $531 trillion in unregulated derivatives and swaps are traded annually. The face value of those contracts equals 8 1/2 times the annual economic output of all nations on earth and billionaire investor Warren Buffet has called them financial weapons of mass destruction, Harkin said.

According to a statement released by Harkin's office Thursday, his Derivatives Trading Integrity Act will bring more transparency and accountability into the marketplace. Specifically, the bill amends the Commodity Exchange Act to eliminate 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, and ends the CFTC's authority to exempt such transactions from the general requirement that a contract for the purchase or sale of a commodity for future delivery can only trade on a regulated board of trade. In effect, this means that all futures contracts must trade on a designated contract market or a derivatives transaction execution facility. Virtually all contracts now commonly referred to as swaps fall under the definition of futures contracts and function basically in the same manner as futures contracts.

Last month, the Senate Agriculture Committee heard dramatic testimony about the impact of unregulated financial derivatives on the U.S. economy. Terrence Duffy, Executive Chairman of the Chicago Mercantile Exchange, told the Committee: "It has been 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 stark contrast, trading of financial futures on regulated futures markets, subject to the oversight of the Commodity Futures Trading Commission, has been a net positive to the economy, 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 our markets."

Senator Harkin has a history of raising questions about these contracts with federal officials. At a February 10, 2000 hearing of the Committee, Harkin, in his position as Ranking Member [of the Senate Agriculture Committee], asked then-Chairman of the Federal Reserve System Alan Greenspan and then-Secretary of the Treasury Lawrence Summers about the potential threats to the financial system from their proposal to deregulate financial swaps and over the counter derivatives.

Pledging to end what he calls "casino capitalism," Senator Tom Harkin (D-IA) Thursday introduced a bill that would place all derivatives and swaps under the regulation of the Commodity Futures Trading Commission.

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