Subject: File No. S7-27-09
From: Daniel B. Kester
Affiliation: op/ed commentator

December 28, 2009

To: Securities and Exchange Commission
December 26, 2009

Howdy folks,

I am definitely in favor of regulating Dark Pool Trading, and believe the proposed regulations are about ten years overdue.

That was so easy but arriving at that conclusion was a much more involved process, as you will find out should you read this to the finish.

Unless an individual has been living a solitary existence, in a cave, for the last five years, they should already be aware that the economic landscape of the United States, and the world, has changed drastically since the passage of two pieces of legislation around the turn of the century.

What the majority dont actually know are the names of these pieces of legislation, or who sought these changes in law, which have crippled the economy. It turns out those who sought the changes and those who required the bailout are the same. I will spare you my personal opinions regarding this coincidence at this time.

The Financial Modernization Act of 1999 (FMA) and, its sequel, The Commodities Futures Modernization Act of 2000,(CFMA) permitted banks, investment banks, insurance companies, and brokerages to merge into conglomerates that became known as too big to fail institutions. It is common knowledge that these institutions did, in fact, fail on many levels causing repercussions affecting every man, woman, and child in the US. The effects of these failures have been felt world-wide and still present, in my opinion, the greatest threat to Americas security that we have ever known.

The creation of new financial supermarkets and the trading of asset backed securities (ABS), mortgage backed securities (MBS), and Credit Default Swaps (CDSs or toxic assets) caused unprecedented damage to Americas financial industry (unless you count the Great Depression).

The SEC is accepting comments concerning regulation changes until 02/22/2010 and I feel the public needs to be made aware of this. The main stream media does not seem to share my respect for the opinions of my fellow citizens, as evidenced by their failure to pursue the original legislation changes, and their effects for the last ten years, in favor of promoting the so-called benefits, as supplied to them by those profiting enormously at the expense of the American taxpayer.

These changes will not be easy to bring about, since many within the industry do not wish to see the end of their cash cow while many others no longer wish to invest in these toxic assets, which leaves US the question, What happens when someone decides to unload this debt at a huge discount on unregulated markets? At some point that will happen, if it is not already, and ownership of American properties will go overseas should default occur to the underlying mortgage contracts. Does anyone else see the danger here?

CME, Citadel abandon plan for CDS trading platform
By Hal Weitzman in Chicago

Published: September 18 2009 18:26 last updated: September 18 2009 18:26

The CME Group, the worlds biggest futures exchange, and Citadel, the hedge fund, on Friday abandoned efforts to establish a trading platform for the $27,000bn credit default swap market.

The move came after a year-long effort by the groups, which conceded on Friday that they could not attract any interest from the Wall Street banks that are the main dealers in the contracts.

The move is an embarrassing setback for two of the USs most powerful financial institutions, which touted their solution as a transparent and efficient alternative to the structural risks in the market for agreements such as credit default swaps.

That pitch was made as financial regulators in the US and Europe pushed for reform to help safeguard the financial system against the catastrophic effects of defaults.

The opacity of CDS contracts which offer insurance against banks, companies and governments defaulting on debt has been blamed for aggravating the financial crisis. Currently, CDS contracts are private bilateral deals, which raise the potential problem that one side will not pay out in the event of default. The near-collapse of Bear Stearns and the bankruptcy of Lehman Brothers last year highlighted the counterparty risks associated with the contracts.

The failure of the venture by the two Chicago-based companies indicates the strength of the opposition to overhauling the market among the Wall Street powerhouses that collectively deal about 80 per cent of all CDS trades. End of quote

Evidently Im not the only person to realize this, now. Perhaps it would be time well spent to take a look at some of the warnings given when these regulation changes were in their infancy

The following quote is an excerpt from a speech by Sen. Wellstone (D-MN) on the Senate floor during the debate whether the FMA of 1999 should be passed, "...And with considerable justification they have reached the conclusion that too much of the legislation we pass in Congress works to the advantage of folks who have the capital, who have the wealth, who have the access, and who have the influence.

And they've reached the conclusion that, as rural citizens or low-income citizens or minority communities or family farmers or just regular plain ordinary citizens and consumers, they get the short end of the stick.

S. 900 is legislation that goes in the direction of giving more power to the privileged few and giving ordinary citizens less say in the economic decisions that affect their lives. S. 900 is bad for consumers, it is bad for low-income families, it is bad for rural communities, it creates potentially enormous risks for the economy, and it exposes taxpayers--please remember the SL debacle--to tremendous liability.

I believe S. 900 is bad legislation that as a nation we will soon regret. I yield the floor. End of quote.

The entire text of his speech may be found at:

Congressional Record
(Senator Wellstone, may he rest in peace, spoke eloquently and for some time. His speech begins at the top of the right hand column on this page, and continues for four pages. It IS a good read, folksanother of my favorite quotes from this speech speaks volumes to our present situation) Huge financial conglomerates the size of Citigroup will truly be too big to fail. Government officials and Members of the Congress will be prone to confuse Citigroups interests with the public interest, if they dont already. end of quote.

There were many other legislators who spoke, concerning FMA, but their comments were more congratulatory expressing their enthusiasm and disregarding possible drawbacks:


The PRESIDING OFFICER. The Senator from New York.

Mr. SCHUMER. Mr. President, I thank Chairman GRAMM, Senator SARBANES,
Chairman LEACH, Representative BLILEY, and all of my colleagues
who have worked so long and hard on this legislation, with particular thanks
to Senators DODD and EDWARDS who worked with us in the late night hours
to come up with a compromise that eventually helped get this bill passed.
Mr. President, this is a historic moment. We have been working towards it
for 18 years. It has taken 18 years for Congress to pass this bill

There are many reasons to pass this bill. My goal, which I stated at the outset, was to modernize financial services but not take one step backward on CRA. We have done that. The CRA provisions in the bill do not move things forward, but they do not take a single step backward. In fact, as I have argued to the groups in my State, they will benefit from this legislation because their leverage in the CRA process has always been when there are new mergers or new products that a bank decides to add. This is going to increase 10, 20 times. Every time the groups are interested in CRA--one of the most successful banking laws we have passed--they will have that leverage. Instead of two or three opportunities a year, they will probably have two or three a month. I argue CRA groups are going to be so busy with all the new mergers and all the new services that they may not have time to keep up.

Does the bill go as far as I wish on privacy? No. But privacy is a large and complicated issue. We don't know what the balance ought to be between the ability of businesses to share information and the right of the consumer to protect his or her information. In the Senate, we did not have a single hearing on privacy. To restructure all of privacy with huge numbers of unknown consequences on this bill made no sense. My goal, again, was, can we move forward? We have. Not as far as I prefer or many prefer but certainly not enough to sink a bill that has so many necessities.

Finally, safety and soundness. The one thing that has dominated my thinking in this area is that we not repeat an S L crisis, and we not allow insured deposits to be used for risky activities. I am proud to say the compromise between Treasury and the Federal Reserve in the structure of the bill makes sure that when insured dollars are used for anything that might be slightly risky, the capital requirements and firewalls will make virtually certain we will not repeat the kind of S L crisis we have had in the past.

In conclusion, this is a historic day. It is a historic day for my State of New York, which I am proud to say is the financial capital of the world and, with this bill, has a much greater likelihood of remaining so. It is a historic day for modernizing one of the most important industries in America where we are technologically and entrepreneurially ahead of the rest of the world. This will help maintain our lead. And it is a historic day for those who have argued that we need to keep CRA strong and keep consumer protections in the bill.

From Glass-Steagall to Gramm-Leach, from the Great Depression to the Golden Age, from isolationist to internationalist, from underdogs to champions, this bill is an American success story for our economy, for our financial institutions, for our communities and consumers, and for my State of New York. I was proud to have played a role with so many others in ensuring its passage.

The PRESIDING OFFICER. The Senator from Maryland.

Mr. SARBANES. Mr. President, I commend the Senator from New York for his statement. I underscore the positive and constructive role he played with respect to this legislation throughout, and thank him for his contribution to this effort.

The PRESIDING OFFICER. The clerk will call the roll.

The legislative clerk proceeded to call the roll

Mr. LOTT. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

The VICE PRESIDENT (authors note: Al Gore). Without objection, it is so ordered.

ENROLLED BILLS PRESENTED -- (Senate - November 09, 1999)
Page: S14406
The Secretary of the Senate reported that on November 9, 1999, he had presented to the President of the United States, the following enrolled bills:

S. 468. An act to improve the effectiveness and performance of Federal financial assistance programs, simplify Federal financial assistance application and reporting requirements, and improve the delivery of services to the public.

S. 900. An act to enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, insurance companies, and other financial service providers, and for other purposes.
END end of quote

In order to properly understand what Senator Wellstone was speaking against, please read these quotes from this PBS Frontline article which aired in May of 2003. Many of the names of the people and corporations will be familiar to you if you have watched news broadcasts with any regularity for the last two and one half years. I offer this little tidbit before you start Glass-Steagall was legislation passed in the 30s to prevent anything like the Great Depression from ever happening again, folks.


First efforts to loosen Glass-Steagall restrictions

Some lobbyists even brag about how the bill put their kids through college.

In the 1970s, some brokerage firms begin encroaching on banking territory by offering money-market accounts that pay interest, allow check-writing, and offer credit or debit cards.

Fed begins reinterpreting Glass-Steagall Greenspan becomes Fed chairman

In December 1986, the Federal Reserve Board, which has regulatory jurisdiction over banking, reinterprets Section 20 of the Glass-Steagall Act, which bars commercial banks from being "engaged principally" in securities business, deciding that banks can have up to 5 percent of gross revenues from investment banking business. The Fed Board then permits Bankers Trust, a commercial bank, to engage in certain commercial paper (unsecured, short-term credit) transactions. In the Bankers Trust decision, the Board concludes that the phrase "engaged principally" in Section 20 allows banks to do a small amount of underwriting, so long as it does not become a large portion of revenue. This is the first time the Fed reinterprets Section 20 to allow some previously prohibited activities.

In the spring of 1987, the Federal Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Paul Volcker. The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities. Thomas Theobald, then vice chairman of Citicorp, argues that three "outside checks" on corporate misbehavior had emerged since 1933: "a very effective" SEC knowledgeable investors, and "very sophisticated" rating agencies. Volcker is unconvinced, and expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public.

In March 1987, the Fed approves an application by Chase Manhattan to engage in underwriting commercial paper, applying the same reasoning as in the 1986 Bankers Trust decision, and in April it issues an order outlining its rationale. While the Board remains sensitive to concerns about mixing commercial banking and underwriting, it states its belief that the original Congressional intent of "principally engaged" allowed for some securities activities. The Fed also indicates that it will raise the limit from 5 percent to 10 percent of gross revenues at some point in the future. The Board believes the new reading of Section 20 will increase competition and lead to greater convenience and increased efficiency.

In August 1987, Alan Greenspan -- formerly a director of J.P. Morgan and a proponent of banking deregulation -- becomes chairman of the Federal Reserve Board. One reason Greenspan favors greater deregulation is to help U.S. banks compete with big foreign institutions.

Further loosening of Glass-Steagall

In January 1989, the Fed Board approves an application by J.P. Morgan, Chase Manhattan, Bankers Trust, and Citicorp to expand the Glass-Steagall loophole to include dealing in debt and equity securities in addition to municipal securities and commercial paper. This marks a large expansion of the activities considered permissible under Section 20...

In 1990, J.P. Morgan becomes the first bank to receive permission from the Federal Reserve to underwrite securities, so long as its underwriting business does not exceed the 10 percent limit.

Congress repeatedly tries and fails to repeal Glass-Steagall

Attempts to repeal Glass-Steagall typically pit insurance companies, securities firms, and large and small banks against one another, as factions of these industries engage in turf wars in Congress over their competing interests and over whether the Federal Reserve or the Treasury Department and the Comptroller of the Currency should be the primary banking regulator.

Fed renders Glass-Steagall effectively obsolete

In December 1996, with the support of Chairman Alan Greenspan, the Federal Reserve Board issues a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting (up from 10 percent).

This expansion of the loophole created by the Fed's 1987 reinterpretation of Section 20 of Glass-Steagall effectively renders Glass-Steagall obsolete. Virtually any bank holding company wanting to engage in securities business would be able to stay under the 25 percent limit on revenue. However, the law remains on the books, and along with the Bank Holding Company Act, does impose other restrictions on banks, such as prohibiting them from owning insurance-underwriting companies.

In August 1997, the Fed eliminates many restrictions imposed on "Section 20 subsidiaries" by the 1987 and 1989 orders. The Board states that the risks of underwriting had proven to be "manageable," and says banks would have the right to acquire securities firms outright.

In 1997, Bankers Trust (now owned by Deutsche Bank) buys the investment bank Alex. Brown Co., becoming the first U.S. bank to acquire a securities firm.

Sandy Weill tries to merge Travelers and J.P. Morgan acquires Salomon Brothers

In the summer of 1997, Sandy Weill, then head of Travelers insurance company, seeks and nearly succeeds in a merger with J.P. Morgan (before J.P. Morgan merged with Chemical Bank), but the deal collapses at the last minute. In the fall of that year, Travelers acquires the Salomon Brothers investment bank for $9 billion. (Salomon then merges with the Travelers-owned Smith Barney brokerage firm to become Salomon Smith Barney.)

April 1998
Weill and John Reed announce Travelers-Citicorp merger

On April 6, 1998, Weill and Reed announce a $70 billion stock swap merging Travelers (which owned the investment house Salomon Smith Barney) and Citicorp (the parent of Citibank), to create Citigroup Inc., the world's largest financial services company, in what was the biggest corporate merger in history.

The transaction would have to work around regulations in the Glass-Steagall and Bank Holding Company acts governing the industry, which were implemented precisely to prevent this type of company: a combination of insurance underwriting, securities underwriting, and commercial banking. The merger effectively gives regulators and lawmakers three options: end these restrictions, scuttle the deal, or force the merged company to cut back on its consumer offerings by divesting any business that fails to comply with the law.

Weill meets with Alan Greenspan and other Federal Reserve officials before the announcement to sound them out on the merger, and later tells the Washington Post that Greenspan had indicated a "positive response." In their proposal, Weill and Reed are careful to structure the merger so that it conforms to the precedents set by the Fed in its interpretations of Glass-Steagall and the Bank Holding Company Act.

Unless Congress changed the laws and relaxed the restrictions, Citigroup would have two years to divest itself of the Travelers insurance business (with the possibility of three one-year extensions granted by the Fed) and any other part of the business that did not conform to the regulations. Citigroup is prepared to make that promise on the assumption that Congress would finally change the law -- something it had been trying to do for 20 years -- before the company would have to divest itself of anything.

Citicorp and Travelers quietly lobby banking regulators and government officials for their support. In late March and early April, Weill makes three heads-up calls to Washington: to Fed Chairman Greenspan, Treasury Secretary Robert Rubin, and President Clinton. On April 5, the day before the announcement, Weill and Reed make a ceremonial call on Clinton to brief him on the upcoming announcement.

The Fed gives its approval to the Citicorp-Travelers merger on Sept. 23.

Intense new lobbying effort to repeal Glass-Steagall

Following the merger announcement on April 6, 1998, Weill immediately plunges into public-relations and lobbying campaign for the repeal of Glass-Steagall and passage of new financial services legislation (what becomes the Financial Services Modernization Act of 1999). One week before the Citibank-Travelers deal was announced, Congress had shelved its latest effort to repeal Glass-Steagall. Weill cranks up a new effort to revive bill.

Weill and Reed have to act quickly for both business and political reasons. Fears that the necessary regulatory changes would not happen in time had caused the share prices of both companies to fall. The House Republican leadership indicates that it wants to enact the measure in the current session of Congress. While the Clinton administration generally supported Glass-Steagall "modernization," but there are concerns that mid-term elections in the fall could bring in Democrats less sympathetic to changing the laws.

In May 1998, the House passes legislation by a vote of 214 to 213 that allows for the merging of banks, securities firms, and insurance companies into huge financial conglomerates. And in September, the Senate Banking Committee votes 16-2 to approve a compromise bank overhaul bill. Despite this new momentum, Congress is yet again unable to pass final legislation before the end of its session.

As the push for new legislation heats up, lobbyists quip that raising the issue of financial modernization really signals the start of a fresh round of political fund-raising. Indeed, in the 1997-98 election cycle, the finance, insurance, and real estate industries (known as the FIRE sector), spends more than $200 million on lobbying and makes more than $150 million in political donations. Campaign contributions are targeted to members of Congressional banking committees and other committees with direct jurisdiction over financial services legislation.

Oct.-Nov. 1999
Congress passes Financial Services Modernization Act

After 12 attempts in 25 years, Congress finally repeals Glass-Steagall, rewarding financial companies for more than 20 years and $300 million worth of lobbying efforts. Supporters hail the change as the long-overdue demise of a Depression-era relic.

On Oct. 21, with the House-Senate conference committee deadlocked after marathon negotiations, the main sticking point is partisan bickering over the bill's effect on the Community Reinvestment Act, which sets rules for lending to poor communities. Sandy Weill calls President Clinton in the evening to try to break the deadlock after Senator Phil Gramm, chairman of the Banking Committee, warned Citigroup lobbyist Roger Levy that Weill has to get White House moving on the bill or he would shut down the House-Senate conference. Serious negotiations resume, and a deal is announced at 2:45 a.m. on Oct. 22. Whether Weill made any difference in precipitating a deal is unclear.

On Oct. 22, Weill and John Reed issue a statement congratulating Congress and President Clinton, including 19 administration officials and lawmakers by name. The House and Senate approve a final version of the bill on Nov. 4, and Clinton signs it into law later that month.

Just days after the administration (including the Treasury Department) agrees to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as Weill's chief lieutenant. The previous year, Weill had called Secretary Rubin to give him advance notice of the upcoming merger announcement. When Weill told Rubin he had some important news, the secretary reportedly quipped, "You're buying the government?" end of quote

The purpose of this nostalgic re-visiting of articles, speeches, and concepts that were available (and valid) at the end of the 90s is to compare what was imagined, what was warned, and what has actually happened. The only value to 20/20 hindsight is in creating 20/20 foresight.

I believe these quotes, pertaining to events occurring concurrently with the passage of FMA of 1999, prove sufficiently that there was momentum within the financial hierarchy to not just compete against the financial giants of the world, but to CONTROL the finances of the world. (This was a goal that the world was not, and still is not, ready to embrace.)

Even with the technological advances, legislation changes, and the blessings of the Clinton administration, there was more legislation necessary to unlock the full potential of the New AND Improved face of Americas economic vision. Almost immediately, the legislative wheels began (if this was collusion and/or conspiracy perhaps I should say continued?) the process of turning out the

I believe my contention that this was an ongoing project, designed to (eventually) allow the marketing of risky financial instruments, to be validated by the following testimony:

JULY 30, 1998

I appreciate the opportunity to testify on behalf of the Securities and Exchange Commission ("SEC" or "Commission") regarding its views on issues relating to the federal regulation of transactions involving over-the-counter ("OTC") derivatives and hybrid instruments. These issues involve significant questions of public policy that require the attention of Congress, members of the financial regulatory community, and interested industry participants.

Benefits of OTC Derivative Instruments

It is widely recognized that OTC derivative instruments are important financial management tools that, in many respects, reflect the unique strength and innovation of American capital markets. In fact, U.S. markets and market professionals have been the global leaders in derivatives technology and development.
OTC derivative instruments provide significant benefits to corporations, financial institutions, and institutional investors by allowing them to manage risks associated with their business activities or their financial assets. These instruments, for example, can be used by corporations and local governments to lower funding costs, or by multinational corporations to reduce exposure to fluctuating exchange rates. Because of the range of benefits these products offer, the OTC derivatives market has grown significantly during the past two decades.

The growth in activity involving this market has come, in part, as a result of the careful approach to regulation taken by Congress and by U.S. financial regulators. That approach has focused on promoting legal certainty for OTC derivative transactions and encouraging the development of sound industry practices. That approach has also relied on building consensus among U.S. financial regulators through their participation in the President's Working Group on Financial Markets.

Concerns Regarding the CFTC Concept Release on OTC Derivatives

The recent concept release on OTC derivative instruments issued by the Commodity Futures Trading Commission ("CFTC") represents a significant departure from the careful approach taken by the SEC and other regulators to the OTC derivatives market.
In its concept release, the CFTC raises the possibility of applying a comprehensive regulatory regime to transactions involving swaps and hybrids as a condition for exempting such products from the requirements of the Commodity Exchange Act ("CEA"). Such a regulatory regime would necessarily be based on the CFTC's conclusion that swaps and hybrids are futures contracts or commodity options and, as such, are subject to CFTC jurisdiction under the CEA.

I joined the other members of the President's Working Group -- Treasury Secretary Rubin and Chairman Greenspan of the Federal Reserve Board -- in objecting to the issuance of the CFTC's concept release, citing grave concerns about the possible consequences of the CFTC's action.

In particular, these concerns focus on the risk that the CFTC's action may increase the legal uncertainty concerning swaps and other OTC derivative instruments and, thus, destabilize what has become a significant global financial market. Uncertainty created by the CFTC's concept release and concerns about the imposition of new regulatory costs
may also stifle innovation and push transactions offshore.

Any consideration of the issues facing the OTC derivatives market, such as legal certainty, the concerns of industry participants, and the role of U.S. financial regulators, must begin with an examination of how this market has evolved and which products are involved in the bilateral transactions conducted between market participants. A convincing argument has not been made that developments in the OTC derivatives market since 1994 -- when the members of the Working Group last testified before Congress on this market -- or since 1995 -- when the SEC and CFTC worked with the Derivatives Policy Group to develop a framework for voluntary oversight of OTC derivatives -- merit the CFTC's consideration of a vast, new scheme to regulate this market. Indeed, questions relating to what kind of regulation, if any, is appropriate for this market are ones that should not be addressed by an agency acting under a statute intended to govern only exchange trading in futures and commodity options.


In its concept release, the CFTC set out a broad regulatory agenda for regulating the OTC derivatives market and implies that the CFTC has jurisdiction over this market. We disagree with the CFTC's approach. First, this approach necessarily involves examining the extent to which swaps may be futures subject to regulation under the CEA. On this issue the SEC has been clear -- traditional swaps that are not traded through a multilateral transaction execution facility are not futures and are not subject to regulation under the CEA. This view is shared overwhelmingly by the industry.

Second, as Secretary Rubin, Chairman Greenspan, and I suggested in our joint statement, we have serious doubts as to the CFTC's authority to regulate OTC markets. The CEA provides for the regulation of exchange-traded futures, making off-exchange futures transactions illegal under the statute. Nowhere in the CEA has Congress articulated intent that the CFTC regulate off-exchange markets, nor has Congress established standards for the protection of the public interest should the CFTC assert jurisdiction over these markets.

Moreover, the CEA should not be used as a foundation on which to build a system of regulation for the OTC derivatives market. Because of the difference in goals between exchange markets for futures and OTC derivatives markets, the CEA should be interpreted as providing for exclusive CFTC jurisdiction only over futures contracts that are traded on an exchange. For example, it is critically important to prevent manipulation of exchange markets that perform a price setting function. The OTC derivatives market does not set the price of underlying cash commodities. This difference should be acknowledged in the regulation of these two markets.

Third, we disagree with any plan by the CFTC to regulate the OTC derivatives market through exemption. In enacting the Futures Trading Practices Act of 1992, Congress gave the CFTC broad exemptive, not regulatory, authority regarding OTC swap transactions.

Congress granted this authority to the CFTC without making any determination regarding the status of swaps and other OTC derivative instruments under the CEA. We disagree with the potential exercise by the CFTC of its exemptive authority as a means to regulate areas that have not been determined by Congress to fall within the CFTC's authority. This is very different from the exercise by an agency of its exemptive authority to provide regulatory relief in circumstances where the agency has clear jurisdiction over the activities or products that are subject to the exemption.

Moreover, regardless of the characterization of these instruments under the CEA, both the plain language of the CEA and the legislative history indicate that Congress did not intend for the CFTC to use its exemptive powers to establish a new regulatory regime for the OTC derivatives market. Notably, Section 4(c) of the CEA places certain conditions on the exercise of the CFTC's exemptive authority. These conditions include the requirement that any exemption be in the public interest, that exemptions be limited to transactions that would be effected between persons meeting the definition of "appropriate persons," and that exempted transactions not have a material adverse effect on the ability of the CFTC or any contract market to discharge its regulatory or self-regulatory abilities under the CEA. Beyond these general requirements, Congress did not direct the CFTC to impose substantial additional requirements as a condition for exercising its exemptive authority, choosing instead to allow the CFTC to either exempt transactions unconditionally or on stated terms or conditions.

Given the willingness of Congress to allow the CFTC to exempt transactions without imposing conditions beyond those contained in Section 4(c), it is unlikely that Congress anticipated that the CFTC would establish exemptive conditions that, in effect, would require compliance with a new, comprehensive regulatory scheme for conducting off-exchange transactions. In fact, Congress specifically reserved for itself issues of regulatory policy relating to the OTC derivatives market. As stated in the Conference Report for the Futures Trading Practices Act of 1992, the purpose of giving the CFTC broad exemptive powers was to provide "a means of providing certainty and stability to existing and emerging markets so that financial innovation and market development could proceed in an effective and competitive manner."

The objective was legal certainty for swaps, not expansive regulation of an evolving market.


CFTC's concept release also raises significant concerns regarding the current exemption for hybrid instruments contained in the CFTC's Part 34 rules.

Hybrid instruments are depository instruments or securities products, such as debt or equity securities, that have one or more commodity-dependent components with payment features similar to commodity futures or commodity option contracts. Under the CFTC's Part 34 rules, such instruments may be exempt from regulation under the CEA if the sum of the commodity-dependent values of the commodity-dependent components of the instrument is less than the commodity-independent value of the commodity-independent component.

In its concept release, the CFTC indicates that some experienced practitioners have stated that the definition of hybrid instrument under the Part 34 rules is complex and difficult to understand and apply. We believe that the current definition is working well and that the mathematical computations required under the definition are generally well understood. However, if industry representatives believe that the Part 34 rules are difficult to apply, we would be interested in working thoughtfully with the industry, bank regulators, and the CFTC to address those concerns.

More generally, it seems the CFTC is proposing to substantially narrow the scope of the current hybrid exemption. In addition, the exemption's availability would depend on compliance with a scheme of regulation that would be implemented based on the CFTC's exercise of its exemptive authority. It is important to recognize that all hybrids are already regulated as banking or securities products. Where the commodity-dependent variables are not paramount, there is no need to add another layer of regulation under the CEA.

Concerns of Market Participants

The CFTC's suggestion that swaps and hybrid instruments might be futures or commodity options -- derivative products regulated under the CEA -- represents a significant departure from traditional views about the status of swaps and hybrids under the CEA. A conclusion to this effect would be of great concern to participants in the OTC derivatives market who have long considered the CFTC's current exemptions for swaps and hybrids to be non-exclusive safe harbors from regulation under the CEA. Consistent with this view, market participants believe that a broader range of swaps and hybrids than those described in the exemptions -- such as products based on equity securities -- also are not subject to regulation under the CEA. If swaps and hybrids in general are considered to be futures or commodity options, as the CFTC suggests, concerns will be raised not only that the CFTC might restrict its existing exemptions, but also that contracts executed outside the terms of these exemptions might be deemed illegal off-exchange contracts in violation of the CEA. Fears regarding the legality of swaps and hybrid instruments could seriously disrupt the derivatives market.

The SEC's "Broker-Dealer Lite" Proposal

The SEC's OTC Derivatives Dealer, or "Broker-Dealer Lite," proposal is intended simply to reduce the regulatory burdens faced by broker-dealers that conduct an OTC derivatives business.

Under the SEC's current regulations, firms that effect transactions in OTC derivative instruments that are securities (such as OTC options on government securities) must register as broker-dealers and comply with the SEC's capital and margin requirements. In some instances, these regulatory costs have resulted in firms dividing their activities, placing non-securities activities in separate, unregistered affiliates located in the United States, and conducting their securities activities abroad.

In proposing special rules for a limited class of broker-dealers, called "OTC derivatives dealers," the SEC recognized that, in some instances, fragmenting a firm's OTC derivatives business may hinder its ability to manage risk and compete for business. If adopted, the proposed rules would provide U.S. securities firms with greater flexibility in structuring their OTC derivatives activities by allowing them to conduct transactions involving both securities and non-securities derivative products through one entity. It should be emphasized here that flexibility is the goal. The proposed rules would reduce, rather than increase, the regulatory impediments to doing business.

Registration as an OTC derivatives dealer would be a voluntary alternative to registration as a fully regulated broker-dealer under the SEC's current rules. Modified capital rules would be applied to these registered dealers, under which they would be allowed to use value-at-risk models for determining market risk charges. OTC derivatives dealers would also be subject to the more flexible margin provisions typically applied to banks. This would make it more economical for the OTC derivatives dealers to conduct transactions involving both securities and non-securities OTC derivative products in the same place.

However, this entire structure would be optional, including the determination as to which, if any, instruments a dealer chose to place in the separate entity, along with its securities OTC derivative products.

The SEC's "Broker-Dealer Lite" proposal does not expand the SEC's jurisdiction, nor does this proposal claim that OTC derivative instruments generally are securities. Under the proposal, OTC derivatives dealers can opt to trade a wide range of derivative products of these, the SEC can only regulate securities transactions engaged in by the OTC derivatives dealer. This does not represent any change in the exercise of the SEC's jurisdiction. Moreover, any activity involving futures transactions by an SEC regulated entity would remain subject to the CFTC's exclusive jurisdiction -- as is the case today.
In short, the SEC's proposal for OTC derivatives dealers is intended to promote market development and innovation and encourage dealers to keep business in the United States.

It also is, in effect, a laboratory in which the SEC can test the operation of new concepts, such as value-at-risk, in a controlled environment, before introducing them into its rules for all broker-dealers. The OTC derivatives market has grown substantially in recent years, and this growth is indicative of the strength and vitality of U.S. capital markets. In contrast, conclusions drawn from the CFTC's concept release raise concerns regarding legal uncertainty for OTC derivative instruments and the imposition of new regulatory costs. These concerns may stifle innovation or push transactions offshore.

Next Steps

The recent letter from Chairman Born agreeing to forego action until next year is a step in the right direction, but we believe it would be possible to go further by addressing the outstanding legal uncertainties created by the concept release. It would be more helpful if the letter clarified that most swaps are not appropriately regulated as futures -- the previous position of the CFTC -- and extended the period of standstill until the re-authorization of the CFTC. Alternatively, the temporary legislative request made by Secretary Rubin, Chairman Greenspan, and myself would provide Congress and the regulatory community adequate time to properly consider the important public policy issues raised by activities in this market.

This request was not made lightly and could help prevent any perception that the U.S. regulatory system imposes an unreasonable amount of legal uncertainty on transactions in the OTC derivatives market, thereby avoiding litigation that could increase this uncertainty.

In particular, the requested legislation would require the members of the President's Working Group to study the OTC derivatives market to evaluate whether any additional safeguards are warranted. The scope of the study would be OTC derivative instruments, including swap agreements, and hybrid instruments. Following completion of the study, the President's Working Group would develop recommendations, as may be appropriate, for changes in statutes, regulations, and policies to improve operation of this market and to enhance legal certainty for swap agreements and hybrid instruments. The legislation would require the President's Working Group to submit a report to Congress describing the study and setting forth any recommendations.

Because of the importance of legal certainty to market participants, the legislation would also maintain the regulatory status quo by imposing a temporary moratorium on the CFTC's ability to restrict its current exemptions for hybrid instruments and swap agreements. More specifically, the legislation would require that prior to the enactment of legislation reauthorizing the CFTC, the CFTC would not be permitted to promulgate any proposed or final rule, regulation, or order -- or issue any interpretive or policy statement -- restricting or regulating activity in any hybrid instrument or swap agreement currently eligible for exemption under the CFTC's regulations. The legislation would also provide legal certainty to derivatives based on non-exempt securities.


In short, the CFTC's concept release raises important policy questions that should not be addressed by the CFTC alone, but rather require the attention of Congress, members of the financial regulatory community, and interested industry participants. The OTC derivatives market is a rapidly growing and extremely vital global market that crosses jurisdictional boundaries among the regulatory community. The legislative proposal put forward by Secretary Rubin, Chairman Greenspan, and me recognizes the need to protect the market from unreasonable and potentially harmful legal uncertainty, while also providing the time needed to allow the President's Working Group to study the issues raised by activities in the OTC derivatives market and to develop, as a group, appropriate recommendations to Congress.

The Commission appreciates the opportunity to offer its perspectives on the OTC derivatives market, and to re-emphasize its serious concerns with the CFTC's concept release and the damaging consequences that concept release could have on this market.

The President's Working Group should be provided with the opportunity to carefully study the OTC derivatives market and to analyze the current regulatory structure. The Commission and its staff welcome any questions on these issues that the Committee may have, and look forward to continued discussions with Congress, the President's Working Group, and industry representatives on these important issues. End of quote...

Please bear in mind that these remarks were made seventeen months prior to the passage of Gramm-Leach-Bliley FMA of 1999 and two and one half years before the signing of the CFMA of 2000, which is actually when those transactions (being discussed) would become legal or not.

Committee approval for this act did not come from a committee on banking or finance. Instead, it came from the Committee on Agriculture, Forestry, and Nutrition whose responsibility it was, and still is, to examine proposed legislation pertaining to commodities. hmmm commodity (noun) 1. traded item especially an unprocessed material 2. useful thing something that people value or find useful source: Encarta Dictionary while the thesaurus lists these words as comparable: product, service, goods, article of trade

All right, this falls within their purview, but the purpose of a committee hearing is to determine if the proposed legislation will be beneficial, and this legislation was recommended by no less than the Presidents Working Group headed by (then) Vice President Al Gore. That endorsement was embraced by leading representatives of the financial industry (after all it concerned the marketing of their products) when the PWGs recommendation was approved by an ad hoc committee of industry leaders, coincidentally involved in lobbying for the FMA of 1999, and who, just coincidentally, were the recipients of the bailout which brought to light the disregarded flaws in that legislation as passed.

This is documented at:

Again, I will insert quotes from the original.

FEBRUARY 10, 2000
Chairman Lugar, members of the Committee, this testimony is submitted by Edward Rosen, a partner with Cleary, Gottlieb, Steen Hamilton, on behalf of an ad hoc coalition of investment and commercial banks (the "Coalition"). The Coalition is comprised of the following institutions:

The Chase Manhattan Bank
Citigroup Inc.
Credit Suisse First Boston Inc.
Goldman, Sachs Co.
Merrill Lynch Co., Inc.
Morgan Stanley Dean Witter Co.

This Coalition is grateful for the opportunity to present the Committee with the Coalition's views regarding the report of the President's Working Group on Financial Markets (the "Working Group") entitled Over-the-Counter Derivatives Markets and the Commodity Exchange Act (the "Report"). The Coalition supports the recommendations set forth in the Report and urges the Committee to incorporate the Report's recommendations in legislation during this session.

I. The Coalition

The six Coalition firms are major participants in all U.S. financial markets, including the securities markets, government securities markets, foreign currency markets, futures markets and derivatives markets. These firms are in the forefront of financial product innovation and compete globally with non-U.S. financial institutions for international business in all financial markets.

These firms have established the Coalition for one purpose: to present to Congress a consensus, market-sensitive view on necessary revisions to the Commodity Exchange Act ("CEA"). As major participants in all financial and derivatives markets, and as members of nearly every major trade association affected by the CEA, this group is able to provide a singular perspective that cuts across product lines and reflects the integrated character of the global markets for these products.

The Coalition welcomes and endorses the Committee's reexamination of the CEA in light of the evolving needs of the markets and market participants, and we particularly support the Committee's interest in developing amendments to the CEA designed to remove barriers to innovation and to resolve issues of legal certainty that affect the use of over-the-counter ("OTC") derivative instruments under the CEA.

The Coalition strongly endorses the Working Group's recommendations to provide greater legal certainty for OTC derivatives transactions and to remove obstacles to the development and use of clearing and electronic trading systems in the OTC derivatives markets.

As noted below, the Coalition recommends that the Committee consider certain additional steps, beyond the scope of the Report, to foster legal certainty, reduce systemic risk and promote technological and financial innovation.

As background for the Committee's consideration of the Report, the Coalition would like to make several general observations:

There is an urgent need for Congressional action during this session. The Working Group has characterized its recommendations as "necessary" and "important". We agree.

The Working Group has presented Congress with valuable and constructive solutions to urgent problems. No solution, however, will be perfect from all perspectives. We must not allow perfection to be the enemy of that which can be achieved.

We must not be seduced by superficial allusions to asymmetrical regulation and allow these to prevent us from accomplishing what can be accomplished. Historically, progress on legal certainty has been held hostage to other legislative objectives. This strategy can no longer be tolerated.

I. Enhancing Legal Certainty for Swaps

The Coalition strongly supports the Working Group's recommendation that bilateral swap agreements involving financial commodities between institutional counterparties be excluded from regulation under the CEA. This exclusion will enhance legal certainty and enhance the position of the United States as a major financial center.

In addition to the recommendations of the Working Group, the Coalition would support further relief for transactions involving non-financial commodities and a clarification that individually negotiated bilateral transactions, including those involving non-financial commodities, are not subject to regulation under the CEA.

II. Electronic Trading Systems

The Coalition supports the Working Group's recommendation to exclude from regulation under the CEA electronic systems for trading financial derivatives which limit participation to institutional counterparties trading for their own accounts. This exclusion would remove a significant barrier to financial and technological innovation in the United States, eliminate legal uncertainty and improve the global competitive position of the U.S. financial sector.

Beyond the Working Group's recommendation, the Coalition would further encourage Congress to create an appropriate "light-handed" regulatory framework for those electronic trading systems that do not operate as exchanges and that would not otherwise qualify for exclusion from the CEA under the Working Group's recommendations. This new framework would create a legal basis for the future evolution of electronic trading systems, whether developed by exchanges or by other market participants. We would be happy to work with the Committee to develop such a framework.

III. Clearing Systems

The Coalition welcomes the Working Group's recommended clarification that qualifying swaps may be cleared without subjecting the underlying transaction to regulation under the CEA.

The Coalition also endorses the Working Group's recommendation that Congress provide a statutory basis for the oversight of clearing systems for OTC derivatives by the CFTC, federal bank and securities regulators and appropriate foreign financial regulators. We believe that creating an appropriate regulatory regime will encourage the development of clearing facilities for OTC derivatives in the U.S. and, in turn, contribute to the stability of the financial system. We would also view the codification of CFTC authority to oversee clearing of OTC derivatives as a positive and useful development.

IV. Treasury Amendment

The Coalition welcomes the Working Group's recommendation to clarify the intent of the Treasury Amendment by replacing the term "board of trade" with the term "organized exchange." This clarification alone will eliminate a great deal of uncertainty and forestall much of the litigation that has arisen in this area in the past.

We also support the Working Group's recommendation that Congress provide the CFTC with authority to address potential abuses of retail customers by foreign currency "bucket shops."

V. Hybrid Instruments

In the area of hybrid instruments, the Working Group recommended that Congress clarify that the CEA's restriction on futures on non-exempt securities does not apply to hybrid instruments that would otherwise qualify for exemption from the CEA under the CFTC's current rules. The Coalition supports this recommendation. However, the Coalition urges Congress to take additional steps to codify an exemption for hybrid instruments, including those involving non-exempt securities, similar in scope to the CFTC's current exemption for hybrid instruments. We would be pleased to work with the Committee to accomplish that objective.

VI. Single-Stock Futures Shad-Johnson Accord

The Coalition does not believe that single-stock futures should be unlawful per se. The Coalition welcomes the CFTC-SEC dialogue on this subject requested by you, Mr. Chairman, and referenced in the Report, and stands ready to assist in any efforts to address the regulatory challenges posed by these products.

Congress must recognize that providing legal certainty for OTC derivative instruments and removing barriers to innovation are much more urgent matters for U.S. financial markets than creating a regulatory framework for single-stock futures. In the past, legislative efforts to provide legal certainty for OTC derivatives have been held political hostage to the single-stock futures issue. Congress should not allow this political strategy to undermine opportunities for concrete progress.

VII. Derivatives Dealers

The Coalition agrees with the Working Group's conclusion that no current need has been demonstrated to regulate OTC derivatives dealers, most of whom are already subject to direct and indirect regulatory oversight.

The Coalition notes that the Report reiterates the Working Group's earlier recommendation to expand the SEC's and CFTC's risk assessment authority with respect to broker-dealers and futures commission merchants.(1) The Coalition fully supports the goal of improved risk reporting to financial regulators.(2) The Coalition has some concerns, however, regarding the scope of the Working Group's recommendations in this area, and stands ready to engage in a dialogue on the relevant issues.

VIII. Conclusion

It is time for Congressional action to ensure legal certainty and remove the barriers to innovation posed by the CEA. The Working Group has unanimously urged the Congress to act and has provided Congress with a clear course of action. Moreover, the Working Group's recommendations have widespread support among financial market participants. We urge the Committee to take advantage of these rare conditions and move swiftly during this session to enactment of a bill incorporating the Working Group's recommendations.

Given the extraordinary consensus in the public and private sectors regarding the urgent need for legal certainty, market participants are carefully monitoring the reauthorization process for a signal that Congress will act on these important issues. As we have testified previously, and as financial market participants are acutely aware, the risks and obstacles to innovation posed by the CEA do not burden other major financial centers. If Congress continues to miss opportunities to modernize the CEA, the U.S. will jeopardize its position as the leading global financial center and the U.S. legislative and regulatory community will significantly diminish its own influence over the development of policy governing the global financial markets.

Congress must not allow less important issues to impede progress on these pressing matters.

The Coalition very much appreciates the Committee's interest in these issues and is committed to working with the Committee and other interested parties in an effort to solve these problems once and for all. End of quote

Doesnt that last statement just give you a thrill, knowing what we know now about how these changes would be used to change our lives? The Coalition very much appreciates the Committee's interest in these issues and is committed to working with the Committee and other interested parties in an effort to solve these problems once and for all.

However, any optimism I felt upon that remark failed to overcome the trepidation I felt when I read, We urge the Committee to take advantage of these rare conditions and move swiftly during this session to enactment of a bill incorporating the Working Group's recommendations., and Congress must not allow less important issues to impede progress on these pressing matters. I believe Congress was given the bums rush on this proposal and they fell for it.

Considering all of the disingenuous testimony given then, and since then, by these same Coalition members, and their current efforts to prevent oversight enactment, and enforcement, they could be tried by any court in the land for charges starting at perjury all the way up to The Patriot Act ... in my opinion.

Last, but not least, let US consider how the CFMA of 2000 was passed and signed into law. Inserted into an omnibus spending bill to fund the government through the 2001 fiscal year it passed through the House easily, and the Senate unanimously, on its way to being signed into law on December 21, 2000.

I cannot honestly say CFMA was hidden because, in the first paragraph of the following quote, Sen. Peter Fitzgerald (IL) does say CFMA is part of the appropriations measure . It just happens that he said it on the day it was voted on,
and passed.

The following information is from:

Title: Making appropriations for the Departments of Labor, Health and Human Services, and Education, and related agencies for the fiscal year ending September 30, 2001, and for other purposes.
Sponsor: Rep Porter, John Edward IL-10 (introduced 6/1/2000) Cosponsors (None)
Related Bills: H.RES.515, H.RES.518, H.R.5656, H.R.5657, H.R.5658, H.R.5660, H.R.5661, H.R.5662
H.R.5663, H.R.5666, H.R.5667, S.CON.RES.162, S.1594, S.2553
Latest Major Action: Became Public Law No: 106-554 GPO: Text, PDF
House Reports: 106-645 Latest Conference Report: 106-1033 (in Congressional Record H12100-12439)
Note: H.R. 4577, the Consolidated Appropriations Act 2001, incorporated in its conference report the provisions of several bills by reference. This included H.R. 5656 - Labor HHS Education Appropriations H.R. 5657 - Legislative Branch Appropriations H.R. 5658 - Treasury Appropriations H.R. 5666 - Miscellaneous Appropriations - except section 123 relating to the enactment of H.R. 4904 H.R. 5660 - Commodity Futures Modernization H.R. 5661 - Medicare, Medicaid and SCHIP Benefits Improvement and Protection H.R. 5662 - Community Renewal Tax Relief and Medical Savings Accounts H.R. 5663 - New Markets Venture Capital Program and H.R. 5667 - Small Business Reauthorization.

The rest of what he said is interesting enough, by itself, to include here, but with the advantage of hindsight, it illuminates what our politicians fondly refer to as a dreaded slippery slope which, when literally translated is, It is hard to hold our position on the moral high ground when our road to the high ground has been built of bovine excrement, and if we acknowledge that then we have to deal with the infrastructure problem, right?

The following quote is but one example.

The commodity futures modernization act of 2000 -- (Senate - December 15, 2000)


Mr. President, I rise in support of the Commodity Futures Modernization Act of 2000 (CFMA''), the proposed legislation to reauthorize the Commodity Futures Trading Commission (CFTC'') and to amend the Commodity Exchange Act (CEA''). This legislation is the Senate companion of H.R. 5660, which Congressman THOMAS EWING introduced yesterday in the House of Representatives and which is part of the final appropriations measure. As an original co-sponsor of the CFMA, I am proud to join Chairmen GRAMM and LUGAR in supporting legislation to provide much needed regulatory relief to the United States futures exchanges, to remove the eighteen-year-old ban on single stock futures, and to bring legal certainty in the multi-trillion dollar derivatives markets.

The CFMA gives a substantial boost to Chicago's futures industry and the 200,000 jobs that depend on it. The Chicago futures exchanges will be given an opportunity to compete on a level playing field with the world markets. Burdensome federal regulations will be removed and a new regulatory structure will be implemented that will give our nation's most important futures exchanges the ability to compete equally with world markets in product innovation and the ever-changing demands of the marketplace.

Chicago's exchanges will now have the opportunity to offer single stock futures so that they can compete with global markets already trading those types of futures. This is potentially an enormous market for Chicago's exchanges and U.S. investors. It goes without saying that this market is absolutely necessary for Chicago to remain the center for world futures trading.

I commend Chairman LUGAR on his efforts to act swiftly to modernize the CEA and to implement the recommendations of the President's Working Group on Financial Markets (PWG''). The challenges involved in such an undertaking are enormous and I appreciate Chairman LUGAR's thoughtful and comprehensive approach to this complex task. As Chairman of the Subcommittee on Research, Nutrition, and General Legislation, I have been actively involved in the evolution of the CFMA and am committed to working closely with Chairman LUGAR, Chairman GRAMM, and my other colleagues to ensure that the United States derivatives markets remain strong, competitive, and viable. The CFMA codifies the recommendations of the PWG to enhance legal certainty for over-the-counter (OTC'') derivatives by excluding from the CEA certain bilateral swaps entered into on a principal-to-principal basis by eligible participants. The market for OTC derivatives has exploded over the past two decades into a multi-trillion dollar industry.

These large and sophisticated markets play an important role in the global economy and legal certainty is a critical consideration for parties to OTC derivative contracts.

Accordingly, the CFMA recognizes that legal certainty for OTC derivatives is vital to the continued competitiveness of the United States markets and achieves this certainty by excluding these transactions from the CEA.

The provisions of the CFMA also address the problem that federal regulation has not adapted to the rapid growth of the financial markets and today serves as a substantial restriction on market competitiveness and modernization. In order for the United States to maintain the most efficient markets in the world, regulatory barriers to fair competition must be removed. The CFMA reduces the inefficiencies of the CEA by removing constraints on innovation and competitiveness and by transforming the CFTC into an oversight agency with less front-line regulatory functions. The provisions for three kinds of trading facilities with varying levels of regulation provide needed flexibility to both traditional exchanges and electronic trading facilities by basing oversight of the futures markets on the types of products they trade and on the investors they serve.

Finally, the CFMA removes the Accord's prohibitions on the trading of single stock futures and small indices. Stock index futures have matured into vital financial management tools that enable a wide variety of investment concerns to manage their risk of adverse price movements. The options markets and swaps dealers offer customers risk management tools and investment alternatives involving both sector indexes and single stock derivatives. It seems only fair that futures exchanges be allowed to compete in this important market.

The CFMA lifts the ban on single and index stock futures restrictions to allow the marketplace to decide whether these instruments would be useful risk management tools and to enhance the ability of the U.S. financial markets to compete in the global marketplace. The bill reforms the Accord to allow both futures and securities exchanges to trade these products under the jurisdiction of their current regulators. The CFMA also allows both the SEC and the CFTC to enforce violations of their respective laws regardless of whether the products are traded on a futures or securities exchange and require that the agencies share necessary information for enforcement purposes.

The CFMA represents an arduous effort to remove burdensome regulatory structures and provide much needed legal certainty to the United States derivatives markets. This effort has produced comprehensive legislation that is designed to remove impediments to innovation and regulatory barriers to fair competition for the United States financial markets. The positive impact of this legislation on Chicago's futures markets cannot be overstated. The CFMA is vital to Chicago remaining the derivatives capital of the world and gives Chicago's futures exchanges the ability to lead the way in the potentially explosive single-stock futures market. End of Quote

Not for nothing, I got a question for yaCan anyone from Chicago stay on topic long enough to explain to me, Hows that workin out for ya? And for US? Oh, by the way, HR 5660 was introduced to the House by Rep. John Edward Porter of the Illinois 10th district. Another coincidence, I suppose.

That almost concludes my justification for recommending that the SEC, and Congress, re- address these issues. In doing so, I hope the following questions are constantly reminding them what it is they are trying to correct.

How many people are unemployed, losing their homes, losing their savings, and losing their retirement benefits, with costs rising for virtually everything, and everything is becoming scarcer, because businesses are going belly up because of an ailing economy, and all those derivatives now are worth (?) almost ten times the total value of everything the USA has? Or rather, had? Im thinking that if it becomes necessary for someone to put salt, pepper, and ketchup on those derivatives, and eat them, it should be the people who created them.

As the second session of the 106th Congress was drawing to a close, the chain of events proceeded like this:

12/15/2000 4:52pm:
ORDER OF BUSINESS - Mr. Young of Florida asked unanimous consent that it shall be in order at any time on the legislative day of December 15, 2000 to call up the conference report on H.R. 4577 that the conference report shall be considered as read when called up that all points of order against the conference report and against its consideration be waived and that debate on the conference report shall continue for not to exceed 90 minutes, equally divided and controlled. Agreed to without objection.
12/15/2000 4:54pm:
Mr. Young (FL) brought up conference report H. Rept. 106-1033 by previously agreed to special order.
12/15/2000 4:55pm:
DEBATE - Pursuant to a previous special order, the House proceeded with 90 minutes of debate on the conference report, equally divided and controlled. (consideration: CR H12100-12439, H12442-12502)
12/15/2000 5:21pm:
DEBATE - The House continued with debate on the conference report.
12/15/2000 6:16pm:
The previous question was ordered without objection.
12/15/2000 6:38pm:
Motions to reconsider laid on the table Agreed to without objection.
12/15/2000 6:38pm:
On agreeing to the conference report Agreed to by the Yeas and Nays: 292 - 60 (Roll no. 603).
Senate agreed to conference report by Unanimous Consent. (consideration: CR S11855-11885)
Message on Senate action sent to the House.
Cleared for White House.
Presented to President.
Signed by President.
Became Public Law No: 106-554.

This was the last piece of legislation signed into law by former President Clinton..

The cost was totally misrepresented, as it turns out, as evidenced by: H.R. 4541
Commodity Futures Modernization and Financial Contract Netting Improvement Act of 2000

As ordered reported by the House Committee on Banking and Financial Services on July 27, 2000

The Balanced Budget and Emergency Deficit Control Act (BBEDCA) sets up pay-as-you go procedures for legislation affecting direct spending or receipts. CBO estimates that enacting H.R. 4541 would affect direct spending and governmental receipts but that there would be no significant impact in any year.
Under BBEDCA, provisions providing funding necessary to meet the government's deposit insurance commitment are excluded from pay-as-you-go procedures. CBO believes that the administrative costs associated with FDIC issuing regulations under H.R. 4541 are related to safety and soundness of deposit insurance, and thus, would be excluded. In any case, we estimate that those changes would be less than $500,000 annually. End of quote

Of course, that estimate was only for expenses through FY 2005 and the actual cost to US would not come to light until it became necessary to pass the Troubled Assets Relief Program.

In researching this chain of events, and justifying my opinion that these markets need to be regulated, I did happen across some entertaining information. At least I found them entertaining. One in particular impressed me so much that I feel obliged to include it now, as a cautionary that these changes must be made correctly, without any more false starts or outright mistakes.

The SEC was involved in just the sort of debate facing them now as per to regulate or not to regulate that is, and was, the question. I know not if they sought my comments for I knew nothing of computers, and the internet, at the time, but, as it turns out, they HAD sought feedback from people considered knowledgeable in financial circles.
Division of Market Regulation:
Advisory Committee on Market Information:
Minutes of December 14, 2000 Meeting
Thursday, December 14, 2000
1:12 p.m.
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C.
Mr. Michael Atkin
Vice President, Financial Information Services Division,
Software and Information Industry Association
Robert G. Britz - New York Stock Exchange
Andrew M. Brooks - T. Rowe Price
Robert Colby - SEC
Matthew S. DeSalvo - Morgan Stanley Dean Witter
Carrie E. Dwyer - Charles Schwab
Mitchell Feuer - Reuters America
Joel Greenberg - Susquehanna Partners
David A. Hunt - McKinsey Company
Simon Johnson - Massachusetts Institute of Technology
Richard Ketchum - National Association of Securities Dealers
Donald C. Langevoort - Georgetown University Law Center

Bernard L. Madoff - Bernard L. Madoff Investment Securities
(Howdy, Bernie I hadnt heard of you then, but I have now)

Mark A. Minister - Bridge Trading
Annette L. Nazareth - SEC
Edward Nicoll - Datek Online Holdings
Gerald D. Putnam - Archipelago
Peter Quick - American Stock Exchange
Eric D. Roiter - Fidelity Management Research Co.
Joel Seligman - Washington University School of Law

By Telephone

Robert H. Forney - Chicago Stock Exchange
William R. Harts - Salomon Smith Barney
Edward J. Joyce - Chicago Board Options Exchange
Thomas M. Joyce - Merrill Lynch

(author's note: Everything up to this point can be read at the URL at the beginning of this quote, and it does pertain to the subject but I wouldnt want anyone to miss this partagain uncletumbleweed)

Mr. Seligman: I saw Bernie let's take your comments and then we'll break for a few minutes.

Mr. Madoff: Thank you, Dean.

You know, maybe it's because I am older than most of the people, that I am somewhat more concerned about some of the proposals. I think the proposals are all very interesting. I think they're very intelligently orchestrated.

But if, in fact, the SEC is looking to diminish their role, somehow or other, in almost any way in this area, I myself am very uncomfortable.

I could tell you that it's sort of interesting that most of these proposals are put together by people who are direct competitors of each other as well as all of us around this table.

That's the nature of the business today, that we're all competing. And I think it's naive to think that this will not present problems of one form or shape somewhere down the road, even if they're unintended.

The SEC must, as they have always been, sort of been the overseer of everything that we do to keep us from injuring ourselves, as well as injuring the public. And I can tell you that, during the whole exercise that we had with ITS and that is still going on with ITS, there are situations that come up that they must intercede and they must be the ones that are going to sort of make the final decision.

So I am not suggesting that we shouldn't change this. Although I guess if I had to come out on one side or the other, I would come out on trying first to fix what is obviously broken in the existing system. I think it's been laid out. It's very clear. And I would be more comfortable addressing some of the issues which we clearly know have to be addressed, see what impact that has on the overall existing system, and then worry about putting new models in right from this point.

So I just I guess my major concern is when I hear these comments about the SEC somehow or other being uncomfortable in this position or wanting to remove themselves from this position of getting involved, fixing rates or overseeing it, I'm not suggesting that they have to be the one to fix the rates. It's just that I think that if they're not at this table, regardless of where we come out on this issue, I see a lot of trouble down the road and I am not certainly willing to put my life in the hands of any vendor or any one brokerage firm or any system because I think we're all in for-profit businesses and I think that that will be the controlling factor at the end of the day.

Mr. Seligman: Thanks, Bernie.

(Laughter) end of quote

Im still not sure if Bernie was for, or against, regulation but, in his own words, "I guess if I had to come out on one side or the other, I would come out on trying first to fix what is obviously broken in the existing system. I think it's been laid out. It's very clear..."

Like the man said, "Thanks, Bernie."

I sincerely hope the SEC has gotten over whatever malady that affected them that day. It is probably not covered under proposed health care legislation anyway. I can only hope that the SEC, and Congress, are ready, willing, and able, to create and enforce regulations that will prevent the sort of damage that unregulated trading has done to US in the last ten years from ever happening again.

To those of you who have read this, and followed the links without getting lost, I commend you, and thank you, but I would ask one more thing of you, please. Try to make others aware of this very important part of American history taking place in their lifetime, and this is a chance for them to be in Americas history before it is written.