November 15, 2010
Our country took a great step forward when it passed The Wall Street Reform and Consumer Protection Act, HR4173. As this law moves through the regulatory rulemaking process, I encourage you to uphold its intent to foster transparency and accountability, especially when it comes to the regulation of the derivatives market.
The Wall Street Reform Act requires that derivative transactions be processed through clearinghouses. These clearinghouses are intended to act as independent agencies, whose involvement in each transaction would create transparency over the amount of risk undertaken by the parties and ensure enough collateral exists to guarantee against defaults. America cannot afford the financial markets to once again destabilize our economy and lead to massive layoffs. To ensure that these clearinghouses remain independent from manipulation, their ownership must be monitored and regulated as called for by the Wall Street Reform Act.
Currently two rules are being considered to regulate the ownership of the clearinghouses, that would the 20/40 Rule and the 5% Rule. The 20/40 Rule follows the spirit of HR4173 by limiting the ownership of a clearinghouse by any number of big banks to 40% overall, which effectively prevents them from holding a controlling interest. The 5% Rule does not apply any such aggregate limits, meaning that 11 such banks could join forces to gain majority interest in a given clearinghouse. If the 5% Rule is implemented through regulation, the independence of the clearinghouses will be at great risk and the ability for Big Banks to continue to manipulate the derivatives market will remain.
We have already seen how well the Big Banks monitor their underlying risks, they are unable to and two years ago their actions led to the financial market collapse. If we are to avoid repeating the mistakes of the past, such a co-opting of the clearinghouses must be prevented: therefore, we urge you to uphold the 20/40 Rule to ensure that the derivatives market is monitored by independent clearinghouses.