Oct. 7, 2008 - Markey to Markets: Derivatives Reform Necessary to Regain Stability
Reform Proposed in 1990s Needed Now More Than Ever, Says Markey
WASHINGTON, D.C. – Representative Edward J. Markey (D-MA), former chairman of the House Subcommittee on Telecommunications and Finance from 1987-1995, today announced the re-introduction of legislation he first proposed in 1994 to reform the “derivatives” market which has played a key role in the current financial crisis. Derivatives are complex financial contracts that allow market participants to hedge risk or make speculative bets regarding interest rates, foreign currencies, commodities, credit defaults or other assets.
"Risky and unregulated, the derivatives
market has ballooned in recent decades. Billions, trillions, tens of trillions
have been traded on paper in this vast but obscure market that stretches across
the globe and involves our most prestigious financial institutions. The failure
of AIG was the direct result of uncontrolled derivatives. This shadowy world of
bets and quick trades must be brought into the sunlight," said Rep. Markey.
The
Derivatives Market Reform Act, H.R.
7266, is based on legislation
Rep. Markey first introduced
on July 14, 1994 as H.R. 4745, and then subsequently reintroduced in 1995 and
1999. The legislation responds to recommendations from a GAO report, "Financial Derivatives: Actions Needed to Protect the Financial
System", requested by Rep. Markey
during his tenure as Telecommunications and Finance Subcommittee chairman.The subcommittee had jurisdiction over the
Securities and Exchange Commission (SEC) and the financial markets.
The legislation creates a framework for improved
supervision and regulation of previously unregulated derivatives dealers,
assures appropriate protections for their customers, and establishes certain
reporting requirements for hedge funds.
"In the early
1990s it was already clear that the derivatives markets were too risky to remain
unregulated. I held several oversight hearings touching on this topic during
1993 and 1994 and intended to push for strong reform following the GAO's
prescient report. Unfortunately, once Democrats lost control of the House in
1994, the new Republican Majority had little interest in increasing financial
regulation," said Rep. Markey.
In fact, the Gramm-Leach-Bliley Act of 1999 effectively prevented the
Securities and Exchange Commission from conducting any oversight of the
derivatives activities of banks.
"Our current
crisis has been exacerbated by the failure of the financial regulators to
effectively use the tools they had at their disposal to avert a meltdown. By
reintroducing the Derivatives Reform Act, I hope to re-open a dialogue on
solutions. This may not be the perfect solution, but one thing is perfectly
clear: derivatives reform must be part of the strategy to rein in the
out-of-control speculation and risk-taking that has severely weakened our
financial system," concluded Rep. Markey.
