The Conference Board Governance Center Blog

Dec
03
2009

Congressional Testimony: Do Financial Reform Now, Focus on Derivatives Markets

While the White House, the House, the Senate and a bevy of U.S. regulators are considering all kinds of financial reform proposals, there are two constant messages: do something very soon and focus on OTC derivatives markets.

In this week alone at meetings of the Joint Economic Committee (JEC), the Senate Agriculture, Nutrition and Forestry Committee and the Senate Foreign Relations Committee, those two messages came across loud and clear from such witnesses as Treasury Secretary Timothy Geithner, former Commodity Futures Trading Commission (CFTC) Chair Brooksley Born and Brookings Institution Senior Fellow in Economic Studies Robert Litan.

Geithner’s Testimony

In the case of Geithner, who this week testified before both the Senate Agriculture and Foreign Relations Committees, he actually had some breaking news.

“There are very detailed negotiations going on right now in parallel with what is going on in the House and Senate on financial reform on a global accord on capital standards [for banks], on bringing more oversight to the derivatives markets and for trying to build a framework for managing future financial crises more effectively,” Geithner told the Senate Foreign Relations Committee Tuesday as part of an update on the G-20 financial reform proposals. (See C-SPAN coverage here.)

When pressed for details by committee chair Sen. John Kerry, Geithner said a deadline had been set for next year on the capital standards accord. But he also had a caveat for the senators regarding timeliness of the financial reform packages being considered in both the House and Senate.

“You need to move on the reform agenda while the memory [of the financial crisis] is still acute,” he said. “If you wait too long, you won’t have much support and it [reform effort] will fade.”

He also warned that any stalling on such legislation could hamper international efforts, such as the G-20’s recommendations for strengthening financial stability. “We have to be able to set the agenda on financial reform,” he said.

Regarding derivatives legislation, Geithner told the Senate Agriculture Committee Wednesday that while he is pleased with the progress he has seen it is imperative that any regulation “establish a comprehensive framework of oversight for the OTC derivative markets.” (Read testimony here.)

Born’s Testimony

Born, who is more known today for having warned about derivatives risks in the late 1990s (See Seattle Times article, May 31), told the Joint Economic Committee Wednesday the CFTC and the SEC should be granted regulatory oversight of all derivatives and their markets. “They would ensure price discovery and limit counter-party risk,” she said. “There should be record-keeping, registration and reporting requirements for all OTC derivatives traders. All OTC trades should be subject to margin reports and all large trades should be subject to capital requirements.”

Litan’s Testimony

Two members of the Pew Task Force on Financial Reform (Litan and Robert Steel, former Wachovia CEO) testified before the JEC the importance of Congress adopting the task force’s recommendations, including one that calls for strengthening all derivatives markets. (By the way, for those of you who don’t know the JEC is the legislative body that reviews economic conditions and recommends improvements in economic policy.)

“Derivatives markets would be more secure and transparent if all OTC derivatives were recorded with trade registries, and OTC transactions were encouraged to migrate to clearinghouses and exchanges,” Litan said. (Read full testimony here)

And tied to the derivatives markets, Litan pointed out the need for better oversight of compensation incentives. “Senior executives and other risk-takers in financial institutions must be rewarded by compensation structures that provide incentives for constructive behavior, not imprudent risk-taking,” he said.  (See The Conference Board Task Force on Executive Compensation report.)

The other four recommendations from the Pew Task Force are:

  • The U.S. must have an early warning system that prevents inappropriate and dangerous financial practices from harming the economy.
  • No financial institution should be too big or complex to fail.
  • One strong and smart prudential regulator should replace the current alphabet soup of agencies.
  • Consumers need better protection from financial abuses.


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One Response to “Congressional Testimony: Do Financial Reform Now, Focus on Derivatives Markets”

  1. […] “There are very detailed negotiations going on right now in parallel with what is going on in the House and Senate on financial reform on a global accord on capital standards [for banks], on bringing more oversight to the derivatives markets and for trying to build a framework for managing future financial crises more effectively,” Geithner told the Senate Foreign Relations Committee Tuesday as part of an update on the G-20 financial reform proposals…(continue reading) […]

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