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Sen. Elizabeth Warren Introduces Derivatives Protection Act

June 29, 2016 (EIRNS)—Sen. Elizabeth Warren (D-Mass.), Sen. Mark Warner (D-Va.), and Rep. Elijah Cummings (D-Md.), the Ranking Member on the House Committee on Oversight and Government Reform, introduced the "Derivatives Oversight and Taxpayer Protection Act" into Congress today.

This legislation is not Glass-Steagall; its purpose is to strengthen Federal oversight of the multi-trillion-dollar derivatives market, and to ensure that financial firms, and not taxpayers, as happened in 2008, are liable for derivative losses. This legislation provides for the securities firms to pay fees to fund the Commodity Futures Trading Commission’s oversight of derivatives. Perhaps most importantly, the Act repeals the favorable treatment of derivatives in bankruptcy.

The Dodd-Frank Act enacted in 2010 was said to fix these problems, but Wall Street’s influence on Congress made Dodd-Frank worthlessly complex at 1,000+ pages, when legislation like Franklin Roosevelt’s 37-page Glass-Steagall Act passed in 1933 was needed.

The Warren-Warner-Cummings bill will strengthen dervivatives oversight by:

  • Directing the Commodity Futures Trading Commission to collect user fees to cover its budget, as the Securities and Exchange Commission is funded;

  • Giving it more enforcement authority so that it can impose civil penalties on firms that break the law;

  • Closing the cross-border loophole, which currently allows big financial firms with operations abroad to circumvent many key CFTC requirements;

  • ending the exemption of certain foreign exchange swaps from CFTC jurisdiction, and

  • increasing data sharing between financial firms and the CFTC, and between the CFTC and financial regulators.

The Act also protects taxpayers by ending the favorable treatment of derivatives in bankruptcy, thereby creating an incentive for private parties to better assess the risk of the derivative contracts they enter; strengthening the CFTC’s margin rule, by requiring the posting of an initial margin in inter-affiliate swaps; banning the use of closeout netting for purposes of calculating minimum capital requirements, and requiring the CFTC and other financial regulators to issue a report addressing concerns about derivatives clearinghouses.

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