A Debut in D.C.

There was a premiere in Washington on October 14, though you might not have read about it in the arts and entertainment pages. Connie made his first appearance on the Congressional hearing stage, representing ISDA and its members before the Capital Markets and Government Sponsored Enterprises Subcommittee of the House Committee on Financial Services.

The script for the Subcommittee hearing was taken from a series of bills that have been introduced in the House of Representatives to address several troubling aspects of the Dodd-Frank Act (DFA) and the subsequent rulemaking. Among the bills discussed in the hearing were ones addressing swap execution facilities, inter-affiliate trades, pension plans’ usage of swaps and the so-called push-out provision of Section 716. Subcommittee chairman Scott Garrett should be commended for providing the stage to debate these important issues.

Our theme was the timeless one of delivering safe, efficient markets. We reiterated our support for the G20’s efforts to reduce systemic risk by focusing on improving counterparty credit risk management and transparency in the OTC derivatives markets. ISDA lent its backing to each of the bills under consideration, as did other individuals and organizations testifying. Our written testimony is available on the ISDA website.

As with any production in Congress, however, not everyone is reading from the same script. From the line of questioning of some members of the subcommittee, it is clear that financial regulatory reform is a play with two acts. Act One, AIG. Act Two, DFA.

This is misguided. Much of DFA has nothing to do with preventing another AIG.  The part that does – improved regulatory transparency – is already in place as a result of the CDS Trade Information Warehouse. It is hard to conceive that AIG-type trades could achieve a level of standardization that would lend themselves to clearing or SEF execution.

In addition, it is not clear to us that there is sufficient appreciation for the range of swaps that are used day in and day out to manage risk. Representatives from pension funds and end-users, in particular, spoke at the hearing of the need to make sure that we are not throwing the baby out with the bathwater. The swap world is one of many characters and scenes.

We will continue to play our part in debates like these, providing information that helps inform decision making. A perfect example of this was Connie’s response to a question regarding transaction costs for users of derivatives trades. One witness asserted that such costs total $50 billion annually. We await the study that demonstrates those costs, but in the meantime, Connie walked through some quick analysis based on straightforward assumptions that made the assertion seem unlikely. We like plots that are based on true stories.