Subject: File No. S7-27-10
From: Michael Manset

November 17, 2010

The passage of HR 4173 was a huge step in the right direction for our government, reigning in reckless behaviors that put our economy at risk. I write to ask the commission to not take a step backward by weakening the regulation of the derivatives market called for in this bill.
During the regulatory period, you have the opportunity to evaluate and implement this landmark legislation. Derivatives are financial instruments that are known for their volatility, and maintaining control over that market is vital to restoring stability to our economy as a whole. But that stability will not be maintained if the new regulations are not upheld.
HR 4173 called for a 20/40 Rule. This rule was an amendment to the clearinghouse requirement set forth in the original bill, which required derivative swaps to be run through clearinghouses as opposed to being done over the counter directly between two financial institutions. The 20/40 Rule strengthened this requirement by preventing ownership shares in theses clearinghouse from exceeding 20%, and by limiting the total ownership by so-called Big Banks to no greater than 40% overall.
However, the option of instead satisfying the requirements set forth in the so-called 5% Rule would effectively nullify the effect of the 20/40 Rule by functioning as an alternative standard. The 5% rule decreases the maximum size of each individual share to 5%, but it does not place any limit as to what total percent can be held by Big Banks. That makes this rule effective a wolf in sheeps clothing.
The 5% Rule makes it possible for such banks to join together in ownership of a given clearinghouse, and to collectively hold majority interest in that clearinghouse. This manipulation of the process would be impossible under the 20/40 Rule, but as long as the 5% Rule exists as an alternative, the 20/40 rule cannot accomplish its intended goal. Therefore, it is my hope that the commission will see fit to remove the 5% Rule from consideration and move forward with the 20/40 Rule alone.