WASHINGTON -- Rep. Edward Markey, D-Mass., said yesterday that he and Rep. John Dingell, D-Mich., will draft a bill designed to close the "gaps" in the regulation of over-the-counter derivatives that are identified in a new General Accounting Office report.
Markey, the chairman of the Energy and Commerce Committee panel that has jurisdiction over securities, said he and Dingell, who heads the full committee, intend to "craft an appropriate package aimed at assuring that the necessary legislative and regulatory reforms that the GAO has recommended actually take place."
Markey told reporters after his telecommunications and finance panel held a hearing on the report that the bill will be limited to the committee's jurisdiction and that he hopes it can be enacted by Congress this year.
He would not specify what the bill will contain, but told those at the hearing that he is "troubled" that securities firm and insurance company derivatives affiliates are largely unregulated by federal agencies.
"There is a regulatory black hole here," he said.
The GAO report calls for the unregulated affiliates to be bought under the purview of one or more federal agencies. It also calls for all derivatives dealers to be made subject to comprehensive and consistent federal regulatory standards that cover reporting, capital, and other areas of concern.
Markey also suggested that disclosure and sales practice standards are needed to protect end users of derivatives from overly risky or unsuitable products.
Opposed or Skeptical
Meanwhile, all of the Republicans and two of the Democrats at the subcommittee hearing were either opposed to legislation or skeptical about the need for it.
Rep. Jack Fields, R-Tex., the top Republican on the subcommittee, said, "The GAO's effort illustrates to me that this subcommittee has a lot of hard work left to do before we begin drafting any legislation.
"The derivatives market is far too big, far too complex, and far too important to hastily move forward in the regulatory arena," Fields said.
Across town, Treasury Secretary Lloyd Bentsen, in a speech before the National Association of Securities Dealers, urged Congress and federal officials "not to overreact" to concerns over derivatives and to "be careful about interfering in markets in too heavy-handed a way."
At the hearing, Fields warned that "a number of the GAO recommendations will prove controversial."
He said he is particularly upset that the GAO report calls for the Securities and Exchange Commission to "ensure" companies have adequate derivatives reporting and risk management systems. The government will be intruding into the affairs of corporate America, he said.
But the GAO's top official, Comptroller General Charles Bowsher, said the SEC already imposes reporting requirements on companies. The SEC could obtain assurances about their derivatives activities through additional reporting requirements rather than through new legislation, he said.
Fields quarreled with the idea that the derivatives affiliates of securities firms and insurance companies are unregulated.
Derivatives affiliates, he said, must provide the SEC with information about their derivatives activities and must meet market-imposed capital requirements to get triple-A ratings and to be competitive.
Insurance companies are regulated by state commissions, Fields said. If federal agencies try to regulate their derivatives activities, they will be pre-empting the states, he said.
But Bowsher said the affiliates are not subject to federal capital standards and federal agency supervision even though banks are. Bank regulatory agencies closely supervise banks' derivatives activities, he said.
Bowsher said the reporting requirements may not be adequate for securities firm affiliates because they require only minimal information to be reported quarterly. While affiliates may have to meet capital standards to get triple-A ratings, he said, their derivatives dealings can change their capital situation rapidly without the knowledge of federal agencies.
James Bothwell, another GAO official, said the derivatives affiliates of insurance companies are not regulated by state insurance commissions.
Costs a ~Red Herring'?
Markey asked Bowsher about complaints by derivatives market participants that the GAO report's recommendations will be costly and overly burdensome and could drive dealers' derivatives activities offshore.
Bowsher said the recommendations are aimed at ensuring derivatives market participants to follow the same paths that the major derivatives dealers, and the banks in particular, already seem to be taking.
The GAO recommendations, he said, are "very sound, very reasonable, very prudent, and not that costly." Bowsher said the cost concerns are a "red herring."
Bowsher said that if the recommendations are adopted, they could actually save money in the long run because they would prevent the occurrence of a derivatives crisis that could spill over into other markets and have disastrous consequences for the global financial system. If such a crisis occurred, the federal government would have to bail out market participants, he said.
Fields argued that securities firms, unlike banks, are never too big to fail and would never be federally bailed out.
But Bowsher said that bank law changes from 1991 authorize the Federal Reserve Board, through its discount window, to pump money to banks in the event of a market crisis that would then be used to help bail out securities firms.
Trying to drive home the need for comprehensive and consistent standards for dealers and end users of derivatives, Bowsher told Fields and other subcommittee members: "Nothing is hurting this industry now more than picking up the paper every week and reading that another company has lost $100 million."
Almost all of the subcommittee members and the GAO officials agreed that the Financial Accounting Standards Board needs to improve accounting and disclosure requirements for derivatives dealers and end users.
Dingell, who was at the House subcommittee hearing for a while, was worried that unsophisticated investors may not be adequately protected from unsuitable derivatives products. He asked GAO officials to study this issue after they said they had not really covered it in their report.
One industry official said after the hearing that while Markey and Dingell plan to sponsor derivatives legislation, they do not now appear to have the votes they would need for it to be adopted by the subcommittee.
Meanwhile, Sen. Donald W. Riegle Jr., chairman a Senate Banking Committee hearing on the GAO report yesterday, announced that he soon will introduce derivatives legislation.