WASHINGTON -- Commodity Futures Trading Commission Chairman Gary Gensler said Oct. 23 that the Obama administration will push Congress to require that all financial derivatives that can go through clearinghouses need to be forced to go through them to avoid another breakdown of the financial system even though two House committees have rejected that approach.
The Obama administration had proposed all standardized derivatives involving big banks such as Goldman Sachs and J.P. Morgan go through clearinghouses, but end users such as airlines, manufacturers and agribusiness including Cargill argued that such clearing would make it prohibitively expensive for them to use derivatives for risk management.
House dissent
House Agriculture Committee Chairman Collin Peterson, D-Minn., said he declined to go along with the Obama administration proposal because the end users had not caused any of the problems that led to the financial crisis.
In their markups of the over-the-counter derivatives regulation bill, both the House Financial Services and House Agriculture committees allowed standardized derivatives involving companies that use the derivatives to manage their price risks to avoid going through a clearinghouse.
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Gensler's take
But in a speech prepared for delivery to a George Washington University Law School symposium, Gensler said, "I believe that all clearable transactions should be required to be brought to a clearinghouse, regardless of what type of entity is on either side of the trade. This would remove the greatest amount of interconnectedness from the large financial institutions."
Noting that the financial services- and agriculture committee-approved bills "limit the clearing requirement to transactions between swap dealers or MSPs," Gensler said "Further improvements could result in the clearing of all clearable transactions where either party is a hedge fund or another financial firm. These entities are responsible for a substantial share of the (over-the-counter) derivatives market and they are capable of meeting these requirements that have such tremendous promise for the responsible management of financial risk."
Addressing concerns
Gensler acknowledged that some commercial counterparties have raised concerns about the potential costs of requiring clearing of their transactions, but he said, "Such concerns could be addressed by permitting end-users to enter into individualized credit arrangements with the clearing members that transact on their behalf, including posting noncash collateral."
He added that if Congress decides to exempt transactions with some end-users from a clearing requirement, that exception should be explicit and narrow.
"I believe that it is most critical that transactions with financial firms, hedge funds and other investment funds benefit from a clearing requirement," he said.
Gensler acknowledged that these transactions are with entities that are not major swap participants, but added, "Let us recall, one of the lessons of last year's crisis was that our government was limited in its options when the big financial firms were in trouble because they were interconnected with thousands of derivatives counterparties. Even though individual transactions with a financial counterparty may seem insignificant, in aggregate, they can affect the health of the entire system."
