BETTER MARKETS SAYS “NO LOOPHOLES” IN DODD-FRANK RULES
Michael Masters, founder and chairman of the board of Better Markets, participated today in a CFTC/SEC roundtable and called on both agencies to ensure final rules for the $600 trillion derivatives marketplace prevent loopholes that could lead to another financial crisis, placing taxpayers and the public treasury at risk.
At the request of both agencies, Masters appeared on all three panels at the roundtable held to determine what firms would be covered as a “swap dealer” and a “major swap participant” under the Dodd-Frank Wall Street Reform and Consumer Protection Act. He said regulators should have enough flexibility under the definitions to provide much-needed oversight over the major firms that will fall under the definition of a swap dealer, and the large nonbank traders that will be designated a major swap participant.
Specifically, Masters outlined the important points at the roundtable:
Swap dealer definition. He noted both agencies have issued a swap dealer definition that appropriately does not ensnare firms that trade infrequently or for their own commercial risk. Masters added that the CFTC and SEC should reject industry attempts to narrow the definition, such as requiring swap trading to be the predominant business of a firm, which would allow nonbanks with major trading divisions to escape oversight from higher capital and margin requirements. This is essential to avoid a huge loophole.
Business conduct standards for swap dealers and major swap participants. Masters called on the agencies to include a requirement that both swap dealers and major swap participants clearly disclose to their customers the costs associated with complex trades, as well as simpler and cheaper alternatives so customers can make the best choice for them. In addition, they should be required to disclose the margin terms and credit risk embedded in a trade, including the cost of the credit. This is the only way derivative users can make informed decisions. Such transparency is at the core of financial reform and the agencies must reject industries attempts
to keep their customers, the public and the regulators in the dark about the complex products that they peddle, many of which blew up last time and caused the financial crisis.
Hedge exclusion for a major swap participant. Under the proposed rules, hedges of commercial risks do not trigger a designation as a major swap participant. Masters argued the definition should be narrowed to exclude riskier trading activity, such as hedges of hedges. The final also rule should require that any hedge precisely match the commercial risk, so major swap participants will not be allowed to disguise risky, speculative trades as hedging. Many speculators gambling in the markets want to hide their actions behind a false claim that they are merely hedging commercial risks. They are not and this loophole must not be opened for them to misclassify their activities and avoid reasonable regulation.
