[Congressional Record (Bound Edition), Volume 154 (2008), Part 17]
[Extensions of Remarks]
[Page 24029]
[From the U.S. Government Publishing Office, www.gpo.gov]




           INTRODUCTION OF ``DERIVATIVES MARKET REFORM ACT''

                                 ______
                                 

                         HON. EDWARD J. MARKEY

                            of massachusetts

                    in the house of representatives

                        Friday, October 3, 2008

  Mr. MARKEY. Madam Speaker, today I am re-introducing the 
``Derivatives Market Reform Act.'' This bill is largely based on 
legislation that I first introduced on July 14, 1994 as H.R. 4745, and 
then subsequently reintroduced in 1995 (as H.R. 1063), and introduced 
again in 1999, as H.R. 3483.
  I am reintroducing the bill again today, on the same day that 
Congress is passing emergency legislation to respond to the crisis 
caused by Wall Street's irresponsible and risky use of derivatives, 
because I believe that if Congress had adopted this type of 
legislation, we might have been able to avoid some of the turmoil that 
has recently affected our Nation's financial markets.
  In 1992, as Chairman of the House Telecommunications and Finance 
Subcommittee, I asked the General Accounting Office to undertake an 
investigation into the derivatives markets, including the size of the 
markets for these financial instruments, their economic rationale, and 
associated risks. In 1994, the GAO submitted its report to the 
Subcommittee, entitled ``Financial Derivatives: Actions Needed to 
Protect the Financial System.'' This report contained a number of 
important recommendations for the financial services industry, Federal 
financial regulators, and for the Congress. The GAO suggested that 
Congress needed to extend Federal authority to currently unregulated 
derivatives dealers, improve coordination among Federal regulators with 
responsibilities over key participants in this market, and restructure 
the regulations applicable to the derivatives markets.
  My legislation was aimed at responding to the GAO's recommendations 
by providing a framework for improved supervision and regulation of 
previously unregulated derivatives dealers, assuring appropriate 
protections for their customers, and establishing certain reporting 
requirements for hedge funds. During the 103rd Congress, the 
Subcommittee held five oversight hearing on key issues relating to the 
derivatives market. As Chairman of the legislative Subcommittee with 
jurisdiction over the Securities and Exchange Commission, it was my 
intention to move forward with derivatives legislation in the 104th 
Congress.
  Unfortunately, the Democrats lost control of the House of 
Representatives in the 2004 elections, and the new Republican Majority 
that took control of the House in January of2005 had little interest in 
increasing financial regulation. Indeed, one of the first bills that 
the House passed as part of Speaker Newt Gingrich's ``Contract with 
America'' was H.R. 1058, the Private Securities Litigation Reform Act. 
This legislation was ostensibly aimed at curbing ``frivolous'' 
securities class action lawsuits, but in fact was drafted in such a way 
to make it more difficult for defrauded investors to sue those whose 
fraud or recklessness had caused them harm. During House floor 
consideration of that bill, I offered an amendment (House Amendment 
270), which would have exempted securities fraud cases involving 
derivatives from the bill's harsh restrictions. Unfortunately, my 
amendment was defeated by a voted of 162-261.
  Following the derivatives-related collapse of the hedge fund Long-
Term Capital Management, I joined with Senator Byron Dorgan to ask the 
GAO to undertake another investigation into the derivatives markets, 
focusing this time on the role that derivatives played in the collapse 
of the hedge fund, Long-Term Capital Management. The GAO's report on 
this matter, entitled, ``Long-Term Capital Management: Regulators Need 
to Focus Greater Attention on System Risk,'' identified a need for 
Federal financial regulators to better coordinate their efforts to 
identify and respond to risks across markets and industries, and has 
called for Federal oversight over currently unregulated derivatives 
dealers who may have significant risk exposure to hedge funds and other 
highly leveraged entities. These recommendations came in addition to 
those made by the President's Working Group on Financial Markets 
earlier in 1999 that legislation be adopted which would require some 
public reporting by hedge funds regarding their investments.
  The ``Derivatives Dealers and Hedge Fund Disclosure Act of 1999'' 
that Senator Dorgan and I are introduced back then responded to GAO's 
and the regulators' recommendations for reforms in the aftermath of the 
LTCM affair.
  Again, the Republican-controlled Congress took no action to 
strengthen derivatives regulation. Instead, Congress passed two bills 
that made the situation worse. First, the Gramm-Leach-Bliley Act of 
1999 effectively tied the SEC's hands when it came to overseeing the 
derivatives activities of banks. Second, the Commodities Futures 
Modernization Act of 2000 largely exempted derivatives from any 
effective oversight or regulation by the Commodities Futures Trading 
Commission.
  And so, with no action on legislation to strengthen derivatives 
regulation, with Congress instead taking steps to make it more 
difficult for federal financial regulators to oversee these markets, 
the foundation was set for our current crisis.
  This crisis was, of course, exacerbated by the failure of the 
financial regulators to effectively use the tools that they still had 
at their disposal to avert a meltdown. In recent weeks we have read how 
the Federal Reserve turned a blind eye to the growing systemic threat 
facing our financial system. We have read how the SEC failed to use its 
broker-dealer holding company risk authority to oversee and respond to 
this crisis. We have read about how they weakened capital rules that 
allowed securities firms to take on far too much leverage. And in the 
weeks and months to come, we will all learn a lot more about the causes 
and consequences of this crisis.
  The bill that I am reintroducing today is aimed at opening a dialogue 
on solutions. I have made some modifications in the text to try to 
address some of the harmful deregulatory provisions enacted into law in 
recent years. But I know that the bill may need further refinement. I 
offer it as a baseline for how we might begin thinking about fixing the 
mess on Wall Street. There may be additional ideas that could improve 
the bill. There may be changes needed to ensure that these provisions 
are fully effective. I look forward to talking with my colleagues, and 
with outside stakeholders, about how we can begin to address this 
problem. Because we do need to act.
  I urge my colleagues to support this important legislation.

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