Committee Focuses on Derivatives, not Consumer Financial Protection agency
AGENCY
New Bedford Standard-Times
Ayesha Aleem
Boston University Washington News Service
Oct. 13, 2009
WASHINGTON—Ever since Wall Street collapsed last year, dragging down major banks and many homeowners with it, the House Financial Services Committee has been working on legislation to establish a consumer financial protection agency. On Wednesday, however, the committee temporarily turned its attention to another area of financial reform—the arcane subject of financial derivatives.
The committee, chaired by Rep. Barney Frank, met on Wednesday to discuss amendments that would impose new rules on derivatives—financial instruments based on another asset. The asset itself is not traded, only the derivative based on that asset.
A futures contract, for example, is an agreement to buy or sell the underlying asset at some future time. So is a credit default swap, the kind of instrument that contributed to last year’s financial meltdown and required a major federal bailout of American International Group, the principal seller of such instruments.
Frank wants new rules governing capital, margins, transparency, record-keeping and reporting of over-the-counter derivatives. For transactions between financial institutions, Frank proposes that they be traded on an exchange.
As for the consumer financial protection agency, as its name suggests, it would set rules aimed at providing greater protection to consumers against financial exploitation.
The rules would also extend to regulation of mortgages, credit and debit cards, installment loans and other products that financial institutions issue.
Frank recently proposed to change the proposed agency’s oversight panel to consist mostly of top bank regulators. This has been negatively interpreted by some who view these regulators as instrumental in the financial crisis. However, Frank said in a telephone interview, consumers would be suitably represented.
Rep. Spencer Bachus of Alabama, the committee’s senior Republican, called the legislation a form of “government bureaucracy” at Wednesday’s hearing. But Frank has reiterated the need for regulation to avert financial turbulence as experienced during this past year.
“The only innovations that thrive are those that attract people’s money in a free-enterprise society,” Frank said in a statement earlier this year. “But there are periods when innovation reaches critical mass, when there is such a combination of new things, it often means that with new technology combined with new ideas, that the existing regulatory framework is left behind. And the role of the public sector is to come up with regulations that allow society the benefit of those innovations in the private sector while curtailing some of the abuses.”
###
