WASHINGTON — Lawmakers criticized regulators Thursday for allowing a turf battle between government agencies to delay efforts to tighten oversight of credit-default swaps.
Witnesses at a House Agriculture Committee hearing made it clear that the creation of two competing CDS clearing houses was being hampered because of ongoing reviews by the Commodities Futures Trading Commission, the Federal Reserve Board, and the Securities and Exchange Commission.
"I want to understand why this thing is bogged down here," said Agriculture Committee Chairman Collin Peterson, D-Minn. "The G20 summit was last weekend. The only thing that came out of there of any substance that everybody agreed on was that we need to get this clearing in place as soon as possible. But it's not happening."
The turf battle has become so fierce one state regulator has bowed out of it. The New York State Insurance Department announced Thursday that it would suspend plans set to begin Jan. 1 to regulate certain types of CDS contracts and insurance.
Representatives from the Fed, the CFTC, the SEC, and the New York State Insurance Department testified on the progress setting up the two U.S.-based clearing houses for credit-default swaps.
One of the clearing houses, formed by CME Group, is to be regulated by the CFTC; the other, formed by Intercontinental Exchange Inc. and The Clearing Corp., would be regulated by the Fed. Both efforts, however, are being reviewed by all three regulators.
In addition, the SEC is considering requests by both projects for exemption from registering themselves as clearing agencies, broker-dealers, exchanges, and securities dealers — requests that Erik Sirri, the director of the SEC's trading and markets division, said are reasonable despite the agency's push to have credit-default swaps recognized as securities.
Mr. Sirri said that without the exemptions, credit-default swaps would be so ill-defined that investors would not want to trade them. But he also made the case for designating the swaps as securities, which would allow the SEC to impose reporting and antifraud requirements on the market.
Lawmakers on the committee expressed frustration at the confusion and lack of progress in the efforts to set up the clearing houses and repeatedly asked what was taking so long and when the clearing houses could be up and running. Mr. Sirri said the SEC would finish its review of the exemption requests by mid-December.
There were also signs that CDS market participants — worried about overly restrictive regulation — are trying to take matters into their own hands.
Financial Times published an excerpt from an e-mail message written by a Morgan Stanley executive describing a proposal, supported by Morgan Stanley and other CDS dealers, to make clearing the swaps contracts mandatory.
"This proposal will include mandatory clearing of CDS (clearing not exchange trading), margin rules, [Federal Reserve] oversight of dealers and large market participants and SEC jurisdiction over anti-fraud and market manipulation activities," the e-mail read.
Industry participants have historically opposed making clearing of credit-default swaps mandatory, citing the importance of unique over-the-counter contracts designed to fit specific investors' needs.
The participants' change of heart seemed tied to anxiety about more restrictive regulation.
"The perception with the banks is that CDS have just gotten a lot of bad press because their role in the credit crisis has been discussed endlessly," said Christopher J. Donohue, the managing director of the GARP Research Center.
"Given the regulation that's likely to happen, they're at least providing some initial step or proactive step and hoping that will lessen the severity of the regulation."
Regulators appear geared up for heavier oversight of the CDS market.
Ananda Radhakrishnan, the director of the CFTC's Division of Clearing and Intermediary Oversight, said that the implementation of guidelines by the President's Working Group on Financial Markets for CDS oversight and transparency in the market "would go beyond the level of transparency we have in futures markets."
