November 15, 2010
As a consultant I have worked with many companies who have been hit hard by the recent economic downturn. In order to facilitate continued economic growth we must prevent our major banking entities from repeating the mistakes of the past. As you evaluate the recent Wall Street Reform legislation, I urge you to pay particularly close attention to the regulation of derivatives.
Derivative swaps are inherently risky: shortfalls associated with such swaps recently contributed to the collapse of multiple banks and the government bailouts of many others. The reform legislation mandated that going forward, such swaps be processed through clearinghouses that had to adhere to a 20/40 formula (no one entity holding an ownership stake greater than 20, and total combined ownership held by big banks could not exceed 40%). Yet now there is discussion of a 5% Rule as an alternative qualifier for such clearinghouses. While the limiting of ownership to prevent undue influence of clearinghouse is certainly an important aspect of these reforms, the 20/40 rule also prevented cooperation by like-minded entities in order to subvert the process. The 5% Rule does not prevent such subversion due to its lack of an aggregate limit on ownership by major banking interests, and therefore fails to effectively achieve the goal of such legislation.
Our countrys businesses and citizens are counting on your commission to ensure that the necessary reforms are put in place, and that any loopholes to bypass such reforms are eliminated. Therefore, I again urge you to push for meaningful regulation of the derivatives market, and the elimination of the 5% Rule as an alternative ownership standard for clearinghouses.