Subject: File No. S7-27-10
From: Robert Matthies
Affiliation: President, Greater Lodi Area Democrats

November 17, 2010

Following the recent stock market crash and ensuing recession, it was obvious that Wall Street reform was overdue. This summer the legislature and the president were successful in passing H.R. 4173 to this effect. Now this bill is in your hands, and we need your commission to uphold the strength of these reforms in the way in which they are implemented.

Certain rules have seen changes proposed during the regulatory process, such as the rule governing the owner ship of clearinghouses in the derivatives market. The original rule as the legislation was written, the 20/40 Rule, prevented conflicts of interest by limiting maximum ownership share that could be held by any one institution to at most 20%. But during the review by the commission and alternate rule has been proposed, the 5% Rule. While this rule seems like it more effectively reduces conflicts of interest by reducing the maximum share that can be held to 5%, it also allows a way for these rules to be sidestepped.

The 20/40 Rule places a cap on the total shares that can be held be banks whose assets exceed $50 billion, not allowing their total combined shares to exceed 40%. This prevents such banks from aligning with one another to hold a joint majority interest in the clearinghouse that would be processing their transactions. The 5% Rule does not have a limit as to the maximum share that such institutions can own, meaning that banks could work together to hold majority interest in the clearinghouse. If they held majority interest they would not be bound to any of the accountability and transparency this bill intended, because they would only be accountable to themselves.

Over the past few years, weve seen what happens when these banks are trusted to watch themselves. By not limiting the total share these banks can hold, the 5% Rule allows the clearinghouses to be bought out by these banks and become extensions of their agendas. This is precisely what the clearinghouse requirement was implemented to avoid, so it is clear that the 20/40 Rule must be the only standard by which clearinghouse ownership is regulated.