Testimony of

**Michael Greenberger**

Law School Professor

University of Maryland School of Law

500 West Baltimore Street

Baltimore, MD 21201

Before the U.S. House Committee on Agriculture

Regarding

**Discussion Draft: The Derivatives Market Transparency and
Accountability Act of 2009**

Tuesday, February 3, 2009

1:00 PM

1300 Longworth House Office Building

I want to thank this Committee for inviting me to testify on the
important issue that is before it today.

I also want to congratulate and thank Chairman Peterson, Ranking Member
Lucas, the whole Committee, and the Committee staff for the Committee's
continuing hard work, thoughtful analysis, and leadership that it has
brought to bear on the widespread concerns that the deregulated
over-the-counter derivatives market has caused the most serious
financial distress in the Nation's economy since the Great Depression.

Since the summer of 2008, this Committee has repeatedly taken the
leadership on regulatory issues of greatest concern to the American
people. When gas prices were reaching over \$4.00 a gallon by the end of
June 2008, this Committee drafted on a day's notice and supervised the
June 26, 2008 passage by a vote of 402 -19 emergency legislation that
would have required the CFTC to implement emergency procedures in the
crude oil futures markets to bring down the then sky rocketing price of
gasoline, heating oil, and crude oil[^1]. The Committee then drafted and
supervised the passage by a 283-133 September 18, 2008 vote of the
Commodity Markets Transparency Act of 2008, which was designed to bring
transparency and accountability to the OTC energy markets, thereby
stifling excessive speculation and unnecessarily high prices for
America's energy needs.[^2] Evidence adduced since the passage of this
September 2008 legislation on the House floor has made it even clearer
that excessive speculation in the unregulated energy and swaps markets
has caused and continues to cause unnecessary and substantial volatility
in the agriculture and energy markets.[^3] On January 14, 2009, for
example, it was reported that, "\[b\]etween Christmas \[2008\] and a
week ago oil prices soared 40 percent, only to reverse almost as sharply
in recent days."[^4] "'The oil markets are suffering acute whiplash,'
said Daniel Yergin, an energy consultant and author of 'The Prize,' a
history of world oil markets. 'Price volatility is adding to the sense
of shock and confusion and uncertainty.'\"[^5]

From October through December 2008, this Committee has held a highly
productive, informative and widely publicized series of hearings on the
role unregulated over-the-counter ("OTC") financial derivatives have
played in causing the present economic meltdown. Now, under the
leadership of Chairman Peterson, a new and comprehensive Discussion
Draft of the Derivatives Markets Transparency and Accountability Act of
2009, has been circulated for comment and is the subject of today's
hearings. Again, that draft legislation is designed to apply time-tested
tools of market regulation to the OTC agriculture, energy and financial
derivatives markets.

There can be little doubt that the overwhelming message of the testimony
presented to this Committee in its hearings on OTC derivatives has
largely established a consensus that the previously unregulated OTC
markets have caused severe systemic economic shocks to the economy,
because of a lack of transparency to the Nation's financial regulators
of these private bilateral agreements, and because of inadequate capital
reserves set aside by OTC derivative counterparties to underpin the
trillions of dollars of financial commitments they made (and are now
owed) through the OTC transactions in question.

In almost all the credit markets examined, the derivative transactions
have increased exponentially the risk and resulting indebtedness within
the underlying markets. For example, New York Insurance Superintendent,
Eric Dinallo, who has been responsible for overseeing two major troubled
financial institutions that come within his regulatory ambit (AIG and
MBIA), has demonstrated that outstanding credit default swaps ("CDS")
"could total three times as much as the actual debt outstanding" in the
markets for which the CDS provide guarantees.[^6] In other words,
because of "naked" credit default swaps that provide payouts to
counterparties who have no interest insurable risk emanating from debts
within these markets (i.e., they are simply wagering, for example, in
exchange for a relatively small insurance-like premium, that subprime
mortgages will not be paid off), the actual billions of dollars of
losses in these markets have been magnified three fold by rampant and
uncontrolled "betting" on these markets.[^7]

By virtue of bailouts, guarantees, and loans (e.g., the FED exchanging
Treasuries at its discount window for banks' troubled subprime assets)
made by the United States Treasury and/or the Federal Reserve, the
American taxpayer has been required to make good on unfulfilled or
potentially unfulfilled commitments of our largest financial
institutions in the OTC derivatives market of up to \$6 trillion.[^8]
With the advent of the stimulus legislation and President Obama's soon
to be announced overarching financial package, the American public's
outlay will doubtless soon grow by further trillions of dollars through
further possible guarantees, purchases of troubled assets (i.e. a "bad
bank"), mortgage and other loans, and further capital infusions into the
financial system.

Of course, the subject of today's hearing does not, and cannot, address
the present multi-trillion dollar "hole" in our economy, which, in turn,
has brought the world markets to their knees. This hearing and the
legislation to which it is addressed is forward looking. The underlying
thesis here is: if we are fortunate enough to dig ourselves out of the
huge financial mire in which we find ourselves, a regulatory structure
must be put in place that will prevent the risk creating and risk
bearing folly that led to the present fiasco.

I have appended hereto a paper I prepared that outlines the severe
damage unregulated OTC derivatives have caused to the market and that
proposes a generic regulatory program designed to apply traditional and
time tested tools of regulatory oversight now governing our equity, debt
and regulated futures markets to our OTC derivatives markets. Suffice it
to say, that I am in agreement with many who have already come before
this committee and the Senate Agriculture Committee on these issues,
including Terrence A. Duffy, Executive Chairman of the CME Group,
Inc[^9]; Eric Dinallo (the New York Insurance Superintendant)[^10];
Professor Henry Hu, Professor of Law at the University of Texas Law
School[^11]; Professor William K. Black of the University of
Missouri-Kansas City[^12]; and Erik Sirri, Director of SEC's Division of
Trading and Markets[^13] as to the regulation of financial OTC
derivatives; and Adam K. White, CFA,[^14] and PMAA's witnesses as to
agriculture and energy OTC derivatives. Former Chair of the Federal
Reserve, Paul Volker, has elsewhere made recommendations and
observations consistent with the above referenced testimony[^15], as has
the January 29, 2009 Special Report on Regulatory Reform of the
Congressional Oversight Panel mandated by the Emergency Economic
Stabilization Act of 2008 ("the bailout legislation").[^16] Finally,
former SEC Chair Arthur Levitt has recommended reversal of the
deregulatory effects of 2000 Commodity Futures Modernization Act on the
OTC markets[^17], and even former Fed Chair Alan Greenspan has admitted
that it was an error to deregulate the credit default swaps market.[^18]

I am pleased that the draft legislation that we discuss today adopts
most of the points made in my appended paper and the recommendations of
the witnesses I have cited above.

In this regard, I support Discussion Draft's:

1.  Requirement of mandatory clearing of OTC derivatives both through
    the CFTC or other appropriate federal financial regulators and by
    the CFTC exclusively in the energy and agriculture markets.

2.  Reporting requirements and regulatory oversight obligations placed
    on designated clearing organizations ("DCOs").

3.  Tailored, precise, and limited exemptions that may be granted by the
    CFTC to the mandatory clearing requirements for individually
    negotiated or, in the words of Goldman Sachs' E. Gerald Corrigan,
    "bespoke" derivatives, i.e., derivatives that by the instrument's
    limited reach and their unsuitability for trading cannot cause
    systemic risk to the nation's economy.

4.  Imposition of speculative limits for non-commercial trading on
    designated contract markets ("DCMs"), designated transaction
    execution facilities ("DTEFs") and on other electronic trading
    facilities, as well as Foreign Boards of Trade, especially insofar
    as those speculation limits are recommended by Position Limit
    Advisory Groups composed in significant part by commercial hedgers
    within the relevant markets, i.e., those who have intimate knowledge
    of the degree of speculation needed in each market to provide
    liquidity.

5.  Establishment of a clear and concise definition of a "bona fide
    hedging transaction" limiting that exclusion from speculation limits
    to those actually engaged as a primary business activity in the
    "physical marketing channel" of the commodity.

6.  Imposition of three additional core principles to the criteria for
    establishing of a designated clearing organization ("DCO"): (1)
    disclosure of general information; (2) publication of trading
    information; and (3) fitness standards.

7.  "Transition rule" requiring existing uncleared swaps or uncleared
    swaps executed for the period after enactment to establish the
    regulatory scheme to be required by the statute to be reported to
    the CFTC.

8.  The banning of "naked" credit default swaps, i.e., those swaps that
    are merely a wager on the viability of an institution or financial
    instrument without requiring the corresponding underlying risk from
    the failure of those institutions or instruments.

9.  The creation of an independent CFTC Inspector General confirmed by
    the Senate.

10. The appointment of at least 200 new full time CFTC employees.

With regard to my comments in support of the draft legislation, I want
to particularly call attention to two commendable aspects of the
legislation.

1.  [The ban on "naked" credit default swaps]{.underline}. Former SEC
    Chairman Christopher Cox has since September 2008 repeatedly
    criticized these instruments as "naked" shorts on public
    corporations that evade the requirements for shorting stocks in the
    regulated equity markets.[^19] He and the New York Insurance
    Superintendent, Eric Dinallo, have warned that these instruments
    encourage the "moral hazard" of providing perverse incentives to
    take actions that cause companies covered by the CDS to fail or, in
    the case of naked short of subprime mortgage paper, borrowers to
    default on their mortgage loans.[^20] As to incentives of undercut
    the mortgage backed paper, i.e., mortgage backed securities or
    collateralized debt obligations, that has led many holders of CDS
    guarantees to oppose, for example, mortgage workouts so that
    mortgage defaults trigger "naked" CDS payments. Chairman Peterson
    had it exactly right when he recently said: "'It is hard for me to
    understand what useful purpose these things are serving, . . . I'm
    not out to get Wall Street, but what's gone on there is jeopardizing
    the world economy.'"[^21] Those who support "naked" CDS argue that
    it is needed for "price discovery." However, the reported "short
    interest" on public companies in the regulated equities market
    already is an adequate "price discovery mechanism" for the worth of
    those companies. For price discovery on CDS guarantees of
    collateralized debt obligations, those CDS that insure actual risk
    on CDO investments should serve any needed price discovery function;
    to the extent that "real" CDS are inadequate for that purpose, the
    undisputed harm done to the economy by "naked" CDS far outweighs any
    price discovery benefits from allowing the continued trading of
    "naked" CDS. Had "naked" CDS been banned in the passage of the CFMA
    in 2000, it is my firm belief that there would have been no need for
    this hearing today in that the outlawing of that product, in and of
    itself, would have substantially mitigated the worldwide financial
    meltdown we are now experiencing.

2.  [Mandatory Clearing]{.underline}. While the financial services
    industry has supported the "availability" of clearing OTC
    derivatives as a "firewall" against systemic risk, they have, for
    the most part, opposed mandatory clearing. As has been explained in
    testimony by the CME Group, for example, a clearing facility, which
    is guaranteeing the performance of both counterparties to an OTC
    derivative contract, can only assume that substantial risk for
    performance for those contracts about which it has complete
    understanding. The requirement to understand contractual risk,
    *inter alia*, requires that the OTC cleared contracts be
    standardized, i.e., so that the clearing facility has substantial
    comprehension of the guarantor role it is playing. Those who oppose
    mandatory clearing worry about the inability to clear
    non-standardized OTC derivatives. As far back as 1993, however, the
    CFTC has promulgated a "swaps" exemption for individual negotiated
    swaps agreements that are not executed on an electronic trading
    facility.[^22] Moreover, the draft legislation provides an arguably
    broader "individualized" exemption with the corresponding precise
    standards that assure that the exemption will only be granted when
    systemic risks will not be posed. In short, the draft legislation is
    a reasonable compromise that accommodates individually negotiated
    contracts that cannot be cleared. It should also be born in mind
    that the Senator Harkin's legislation flatly bans exceptions from
    his requirement that all OTC contracts be exchange traded -- not
    merely cleared.[^23] In this regard, the New York Stock Exchange has
    just advocated that "U.S. policy makers should extend existing
    \[exchange\] rules so that they apply to unregulated derivatives
    instead of drafting new legislation that may take years to
    implement, . . ."[^24]

> My only questions and/or comments on the draft legislation are:

1.  [Express Pre-approval Findings of Suitability of Designated Clearing
    Organizations]{.underline}. The CFMA sets out 14 core principles for
    the establishment of a DCO. As mentioned above, the discussion draft
    adds three new core principles borrowed from the core principles
    applicable to designated transaction execution facilities DTEFs
    (i.e. non-retail exchange trading for high net work institutions and
    individuals). However, as made clear by the CFTC's Director of
    Clearing and Intermediary Organizations, Ananda Radhakrishnan, under
    the Commodity Exchange Act, "DCOs do not need pre-approval from the
    CFTC to clear derivatives, \[but\] any such initiative would be
    required to comply with the relevant core principles set forth in
    the \[statute\] and the CFTC would review it for compliance with
    those principles. . . ."[^25] In other words, the statute allows
    facilities to self certify as DCOs and the CFTC would only then
    examine compliance with core principles after the fact. As is now
    well known, the CFTC "announced" on December 23, 2008 that "the CFTC
    staff would not object to the \[DCO\] certification."[^26] The CME
    submitted its plans to the CFTC staff prior to the operation of its
    DCO. The "CFTC staff reviewed CME's plans to clear credit default
    swaps, including CME's planning risk management procedures, . .
    ."[^27] My search of the CME docket number on the CFTC web site
    shows no accompanying order by the Commission or the CFTC staff
    indicating or explaining such approval. I hasten to add that I have
    little doubt about the qualifications (or indeed the great benefit)
    of the CME, the world's largest derivatives exchanges, engaging in
    this clearing. However, others are eligible to apply for DCO status
    and in an age when the American public is clamoring for transparency
    in governmental actions, especially actions surrounding the present
    financial crisis, and given the great importance of approving an
    institution to clear these highly volatile and potentially toxic
    products, it would seem that pre-approval of a clearing facility
    should be required and that the Commission --not just the staff --
    should issue affirmative and detailed findings about its confidence
    in the applicant serving as a DCO. Indeed, prior to the passage of
    the CFMA in December 2000, the CFTC and its staff issued 18 single
    space pages of detailed findings endorsing the safety and soundness
    of the first applicant to clear swaps.[^28] Since the CFTC staff
    checks the safety and soundness of a DCO one way or another, the
    Committee should add a provision to the legislation requiring
    pre-approval of DCOs trading OTC derivatives and that that
    pre-approval be accompanied by findings demonstrating that the DCO
    applicant meets all applicable statutory requirements. Given the
    importance of the clearing facility in serving as a firewall against
    breakdown of the economy, it seems a small burden to require a
    transparent Commission document reflecting its careful attention
    this important decision.

2.  [Fraud and Manipulation.]{.underline} As the CFMA is presently
    drafted, the swaps exemption in section 2 (g) of the Act excludes
    swaps from the anti-fraud and anti-manipulation provisions within
    the statute.[^29] (This exclusion distinguishes itself from "exempt"
    commodities, e.g., energy futures, which are subject to the Act's
    fraud and manipulation prohibitions.) Senator Harkin's
    legislation, S. 272, by requiring the exchange trading of swaps and
    the elimination of "exemptions" and "exclusions" brings the swaps
    market within the umbrella of the Act's central fraud and
    manipulation prohibitions. As Patrick Parkinson (Deputy Director,
    Division of Research and Statistics of the Federal Reserve System)
    made clear in his November 20, 2008 testimony before this Committee,
    the President's Working Group on Financial Markets is advising that
    OTC clearing facilities qualifications be measured against the
    "Recommendations for Central Counterparties" of the Committee on
    Payment and Settlement Systems of which Mr. Parkinson was the Co-
    Chair and on which the CFTC and SEC served.[^30] Those
    recommendations are replete with concerns about combating fraud in
    the clearing process. In the present climate of American public's
    distrust of financial markets, OTC swaps, as is true of "exempt"
    futures, should be subject to fraud and manipulation prohibitions.
    Moreover, it would seem to be a difficult argument to make that,
    whereas swaps should be cleared, fraud and manipulation should not
    be barred or, conversely, that logic would seem perversely to
    dictate that fraud and manipulation be permitted.[^31]

3.  [Important Inconsistency between Sections 6 and 9 of the Discussion
    Draft]{.underline}. As I read Section 6 (2) (A) of the Discussion
    Draft, it requires that the CFTC "shall . . . establish limits on
    the amount of positions, as appropriate, other than bona fide
    hedge\[rs\] that may be held by any person with respect to . . .
    commodities traded . . . on an electronic trading facility as a
    significant price discovery contract." Section 6 (B) (i) and (iii)
    mandate that these limits "shall be established" within set time
    periods for "exempt commodities" and "excluded commodities." Exempt
    commodities include over-the-counter energy futures contracts exempt
    from regulation by § 2 (h) of the CEA. Excluded commodities cover
    swaps are exempt under § 2 (g). Therefore, it would seem that
    Section 6 of the Discussion Draft mandates the imposition of
    position limits on OTC "exempt" and "excluded" trading. Moreover,
    Section 6 seems, by the breadth of its language, to authorize
    implicitly the CFTC to impose aggregated limits across contract
    markets for specified commodities. On the other hand, Section 9, by
    its terms, appears to require the CFTC to "study" each of these
    issues already addressed in Section 6 and to report back to this
    Committee within one year of enactment. Given the overwhelming
    evidence that has been gathered about the impact of excessive
    speculation on the energy futures and energy swaps markets[^32], for
    example, Section 9 should be struck from that statute, because the
    time for study has long since passed. Moreover, I would urge this
    Committee to follow the bi-partisan lead of Senators Reid, Lieberman
    and Collins[^33] and require -- not simply authorize -- the CFTC to
    impose aggregated speculation limits upon U.S. traders and those
    trading in the U.S. across the energy and agriculture contract
    markets. It should be emphasized that on July 26, 2008 \[check
    date\] the Reid bill garnered 50 of 93 Senate votes in the last
    Congress in an unsuccessful attempt to sustain cloture in the last
    Congress.[^34] Again, given the heightened evidence of excessive
    speculation in the crude oil markets that post-date that July 26^th^
    vote, it could be expected that the 60 votes needed to bring the
    Reid aggregate spec limits bill to a vote on the merits will be
    reached in this Congress. My understanding is that this Committee
    will receive testimony from a broad coalition of industrial
    consumers of energy, including the airlines, truckers, farmers,
    heating oil dealers, and petroleum marketers, strongly backing the
    inclusion of aggregated spec limits for energy and agriculture in
    any bill reported out by this Committee.

4.  [Standards for Approving a Designated Clearing
    Organization]{.underline}. As stated above, I support the Discussion
    Draft's addition of three core principles to the statute's 14
    criteria governing the approval of DCOs. I have also recommended
    above that the Commission -- and not just the CFTC staff -- make
    detailed pre-approval findings that the applicant for DCO status
    meets the criteria for clearing OTC derivatives. Again, the approval
    process is critical because it is universally recognized that a
    "risk management failure by a \[clearing facility\] has the
    potential to disrupt the markets it serves and . . . \[cause\]
    disruptions to securities and derivatives markets and to payment and
    settlement systems, . . ." A mistaken decision by the CFTC about the
    appropriateness of an applicant to serve as a DCO will simply
    recreate the instability of the present system where counterparties
    -- even counterparties rated AAA at the commencement of the
    derivatives transactions -- were ultimately downgraded and not able
    to fulfill their contractual obligations. The DCO approval decision
    requires great sophistication. Three years ago, many then AAA rated
    institutions, such as Lehman, Bear Stearns, or AIG, would have very
    likely been deemed strong DCO candidates. In short, today's AAA
    rated institution may be tomorrow's undercapitalized and overwhelmed
    entity whose failure will undermine the OTC derivatives settlement
    process; and possibly the Nation's economy as a whole. The Fed's and
    the SEC's reliance, for example, on the intricately detailed CPSS's
    "Recommendation for Central Counterparties," raises the question
    whether the CFMA's generalized DCO approval criteria -- even as
    supplemented by the Discussion Draft's three additional criteria --
    are detailed enough to ensure that only the most prudent and stable
    entities to clear OTC derivatives. If the CPSS's recommendations are
    more thorough in this regard (they are certainly more detailed),
    adoption of the CPSS's standards by other committees of Congress for
    their regulators, may become a pretext to seek the removal of the
    CFTC from clearing approval authority. The CPSS recommendations
    should be studied to ensure that that the DCO criteria are complete.

> It is for that reason that my preference would be to adopt exchange
> trading criteria to OTC derivatives as is required by S. 272. The New
> York Stock Exchange has also recently supported an exchange based
> approach.[^35]The statutory requirements for a designated transaction
> execution facility are more rigorous than those for a DCO even as
> those DCO criteria are upgraded by the discussion draft. DCOs are not
> expressly required to establish net capital requirements or financial
> integrity standards for counterparties;[^36] there is no regulation of
> DCO intermediaries as is true in the case of DTEFs;[^37][^38] unlike
> DTEFs, the emergency authority of a DCO is expressly limited to
> withstanding \"disasters\" which in context of the statute is appears
> to be limited to natural disasters or Y2K types of information
> technology problems and not the threat of a systemic meltdown of the
> facility as a whole ;[^39] and there is no requirement for self
> regulation of DCOs as is true of DTEFs.[^40]  Finally, while it is
> true that DTEFs, unlike Designated Contract Markets ("DCM"), do not
> expressly have to establish dispute resolution mechanisms, this would
> be a worthy requirement to be applied to DCOs dealing with the highly
> volatile OTC derivatives markets.[^41]

In sum, the Committee should be congratulated for the scope of its
hearings on these critically important questions and for the
thoroughness of the Discussion Draft.

(Corrected copy)

Appendix A

Memorandum

on

Regulatory Reform of Credit Default Swaps

Professor Michael Greenberger

January 24, 2009

While a litany of factors including lending and financial abuses led to
the present economic meltdown, chief among them was the opaque nature of
the estimated notional \$596 trillion[^42] unregulated over-the-counter
derivatives market. That market includes what is estimated to be the
\$35-65 trillion credit default swaps ("CDS") market.[^43] The
over-the-counter derivatives market was, prior to December 20, 2000,
conventionally understood to be subject to regulation under the
Commodity Exchange Act ("CEA"). On that date, the Commodity Futures
Modernization Act ("CFMA") was passed. That legislation was, for the
most part, rushed through Congress and enacted during a lame duck
session as a rider to an 11,000 page omnibus appropriation bill.[^44]
That statute removed swaps transactions from all meaningful federal
oversight.

In warning Congress about badly needed reform efforts when it considered
the bailout legislation in Senate hearings before the Senate Banking
Committee in September, 2008, SEC Chairman Christopher Cox called the
CDS market a "regulatory blackhole" in need of "immediate legislative
action."[^45] Former SEC Chairman Arthur Levitt and even former Fed
Chair Alan Greenspan have acknowledged that the deregulation of the CDS
market contributed greatly to the present economic downfall.[^46]

In brief, the securitization of subprime mortgage loans evolved from
simple mortgage backed securities ("MBS") to highly complex
collateralized debt obligations ("CDOs"), which were the pulling
together and dissection into "tranches" of huge numbers of MBS,
theoretically designed to diversify and offer gradations of risk to
those who wished to invest in that market. However, investors became
unmoored from the essential risk underlying loans to non-credit worthy
individuals by the continuous reframing of the form of risk (e.g., from
mortgages to MBS to CDOs); the false assurances given by credit rating
agencies that gave misleadingly high evaluations of the CDOs; and, most
importantly, by the "insurance" offered by CDO issuers in the form of
CDS. The CDS "swap" was the exchange by one counter party of a premium
for the other counterparty's "guarantee" of the financial stability of
the CDO. While CDS has all the hallmarks of insurance, issuers of CDS
were urged not to refer to it as "insurance" out of a fear that CDS
would be subject to insurance regulation by state insurance
commissioners. By using the term "swaps," CDS fell into the regulatory
blackhole afforded by the CFMA.

Because CDS was not insurance or any other regulated instrument, the
issuers of CDS were not required to set aside adequate capital reserves
to stand behind the guarantee of the financial stability of CDOs. The
issuers of CDS were beguiled by the utopian view (supported by ill
considered mathematical algorithms) that housing prices would always go
up and that, even a borrower who could not afford a mortgage at initial
closing, would soon be able to extract that appreciating value in the
residence to refinance and pay mortgage obligations. Under this utopian
view, the writing of CDS was deemed to be "risk free" with a goal of
writing as many CDS as possible to develop cash flow from the
"premiums."

To make matters worse, CDS was deemed to be so risk free (and so much in
demand) that financial institutions began to write "naked" CDS, i.e.,
offering the guarantee to investors who had no risk in any underlying
mortgage backed instruments or CDOs. Naked CDS provided a method to
"short" the mortgage lending market, i.e., to place the perfectly
logical bet for little consideration (i.e. the premium) that those who
could not afford mortgages would not pay them off. The literature
surrounding this subject estimates that more "naked" CDS instruments are
extant than CDS guaranteeing actual risk.

Finally, the problem was further aggravated by the development of
"synthetic" CDOs. Again, these synthetics were mirror images of "real"
CDOs, thereby allowing an investor to play "fantasy" securitization.
That is, the purchaser of a synthetic CDO does not "own" any of the
underlying mortgage or securitized instruments, but is simply placing a
"bet" on the financial value of a the CDO that is being mimicked.

Because both "naked" CDS and "synthetic" CDOs were nothing more than
"bets" on the viability of the subprime market, it was important for
this financial market to rely upon the fact that the CFMA expressly
preempted state gaming laws.[^47]

It is now common knowledge that: (1) issuers of CDS did not (and will
not) have adequate capital to pay off guarantees as housing prices
plummet, thereby defying the supposed "risk free" nature of issuing huge
guarantees for the small premiums that were paid; (2) because CDS are
private bilateral arrangements for which there is no meaningful
"reporting" to federal regulators, the triggering of the obligations
there under often come as a "surprise" to both the financial community
and government regulators; (3) as the housing market worsens, new CDS
obligations are triggered, creating heightened uncertainty about the
viability of financial institutions who have or may have issued these
instruments, thereby leading to the tightening of credit;; (4) the
issuance of "naked" CDS increases exponentially the obligations of the
CDS underwriters; and (5) the securitization structure (i.e. asset
backed securities, CDOs and CDS) is present not only in the subprime
mortgage market, but in the prime mortgage market, as well as in
commercial real estate, credit card debt, and auto and student loans. As
these latter parts of the economy falter, the toxicity of the underlying
financial structure falls into a continuous destabilizing pattern. As a
result, for example, the Fed is now spending \$200 billion to buy
instruments outside of the residential mortgage market.[^48]

Finally, while CDS and synthetic CDOs constitute the lit fuse that leads
to the exploding financial destabilization we are experiencing today,
the remainder of the over-the-counter derivatives market has
historically led to other destabilizing events in the economy, including
the recent energy and food commodity bubble (energy and agriculture
swaps), the failure of Long Term Capital Management in 1998 (currency
and equity swaps), and the Bankers Trust scandal and the Orange Country
bankruptcy of 1994 (interest rate swaps).

Because "swaps" are risk shifting instruments or, in their most useful
sense, hedges against financial risk, they were almost certainly subject
to the Commodity Exchange Act prior to the passage of the CFMA in 2000.
The Commodity Future Trading Commission ("CFTC") in 1993 exempted swaps
from that CEA's exchange trading requirement if their material economic
terms were individually negotiated and if they were not traded on a
computerized exchange.[^49] However, the 1993 exemption did not satisfy
the financial services sector and, by 1998, the market grew to over \$28
trillion in notional value without utter disregard for the exchange
trading requirements within the CEA.

As a result in May 1998, the CFTC, under the leadership of then Chair
Brooksley Born, issued a "concept release" inviting public comment on
how that multi-trillion dollar industry might most effectively be
covered by the CEA on a "prospective" basis.[^50] While that effort was
blocked by the Executive Branch and Congress (including the passage of
the CFMA in 2000), the CFTC concept release spelled out a menu of
regulatory tools that have historically been applied to financial
instruments, e.g., equities, bonds, and traditional futures contracts
that have the financial force to destabilize the economy systemically.

The classic indicia of regulation of financial instruments that have
potential systemic adverse impacts on the economy include:

1.  [Transparency]{.underline}. These kinds of financial instruments are
    reported to, and, even often, registered with, a federal oversight
    agency prior to execution. Transparency also requires that all
    transactions and holding be accounted for on audited financial
    statements. The present meltdown has been characterized by the use
    of off balance sheet investment vehicles, e.g., structured
    investment vehicles ("SIVs") to house those instruments with
    potential systemic risk hidden from public view.

2.  [Record Keeping]{.underline}. Counterparties should be required to
    keep records of these transactions for 5 years.

3.  [Immediate Complete Documentation]{.underline}. Since August 2005,
    the Fed has complained that financial instruments pertaining to
    credit derivatives have been poorly documented with back offices
    being very far behind the execution of credit derivatives by sales
    personnel.

4.  [Capital Adequacy]{.underline}. Federal regulators traditionally
    require that parties to regulated transactions have adequate capital
    reserves to ensure payment obligations.

5.  [Disclosure]{.underline}. Federal regulators traditionally require
    full and meaningful disclosure about the risks of entering into the
    regulated transaction.

6.  [Anti-fraud authority and anti-manipulation.]{.underline} The
    regulated markets are governed by statutes that bar fraud and
    manipulation. The CFMA provided only limited fraud protection for
    counterparties by the SEC. The inadequacy of that protection is
    evidenced by both SEC Chairman Cox and former SEC Chairman Levitt
    calling regulation of these markets a "regulatory blackhole."[^51]
    Fraud protection without transparency to the federal regulator is
    meaningless. Moreover, no manipulation protection was included
    within the CFMA with regard to swaps. Effectively, the CFMA
    authorized this massive multi-trillion dollar worldwide swaps market
    without any provisions for protecting against fraud or manipulation.
    Fraud and anti-manipulation protections included within the
    securities and regulated futures laws should be restored to these
    markets.

7.  [Registration of Intermediaries]{.underline}. "Brokers" of equity
    and regulated futures transactions are subject to registration
    requirements and prudential conduct. There is no such protection
    within the swaps market.

8.  [Private Enforcement]{.underline}. As is true in securities laws and
    laws applying to the regulated futures markets, private parties in
    the swaps markets should have access to federal courts to enforce
    anti-fraud and anti-manipulation requirements, thereby not leaving
    enforcement entirely in the hands of overworked (and sometimes
    unsympathetic) federal enforcement agencies.

9.  [Mandatory Self Regulation]{.underline}. As is true of the
    securities and traditional futures industries, swaps dealers should
    be required to establish a self regulatory framework, including
    market surveillance.

10. [Clearing]{.underline}. Again, as is true of the regulated
    securities and regulated futures infrastructure, a strong clearing
    intermediary should clear all trades as further protection against a
    lack of creditworthiness of counterparties.

> The adoption of the traditional regulatory protections for swaps with
> systemic risk characteristics would essentially return these markets
> to where they were as a matter of law prior to the passage of the CFMA
> in 2000. The general template would be that swaps would have to be
> traded on a regulated exchange (which provides each of the protections
> outlined above) unless the proponents of a risk shifting instrument
> bear the burden of demonstrating to a federal regulator that the
> instrument cannot cause systemic risk and will not lead to fraudulent
> or manipulative practices if traded outside an exchange environment.
> It is for that reason, for example, that, in 1993, the CFTC exempted
> from exchange trading requirements privately negotiated contracts not
> traded in standardized format.
>
> The Senate Chair of the committee of jurisdiction over swaps, Senator
> Harkin[^52] , has argued that trading in these instruments should be
> moved back onto regulated exchanges and he even posed the possibility
> of an outright ban on "naked" CDS. In other words, he has called for
> reversing the CFMA in this regard and returning to the regulated
> exchange trading environment with direct federal oversight and self
> regulatory protections that existed prior to the passage of the CFMA.
>
> Three final points should be made.
>
> *Simple Clearing Is Not Enough*. The financial services industry and
> the Bush Administration have argued that clearing facilities for CDS
> will provide adequate regulation. Clearing proposals have been
> advanced to the FED, the SEC, and the CFTC, where they are in various
> stages of approval. As I understand it, the clearing is wholly
> voluntary. Second, clearing without each of the other regulatory
> attributes outlined above, while helpful, does not provide a systemic
> risk firewall. Stocks and traditional futures trading have a complete
> regulatory infrastructure built around the clearing process. For
> example, we would never settle for clearing, and clearing alone, as a
> substitute for the regulatory and self regulatory structure that
> surrounds the equities market.
>
> Moreover, clearing without other prudential safeguards just places an
> apparently sound financial institution as the guarantor of the
> counterparties. Five years ago, AIG might have convincingly advanced
> itself as such an institution. Similarly, a AAA entity that appears
> sound today may become unstable if the entire derivatives market is
> not adequately policed. In sum, the limited step of clearing by itself
> does not adequately protect against systemic risk.
>
> *State Insurance Regulation*. As mentioned above, CDS has all of the
> attributes of insurance. As a result, the New York Insurance
> Superintendant and the Governor of New York in September 2008 required
> that its insurance registrants trading CDS to those wanting to
> indemnify their own real risks in the mortgage market be subject to
> state insurance law by January 1, 2009 with corresponding capital
> adequacy requirements.[^53] In this vein, it is interesting to note
> that AIG, a New York insurance regulatee, had \$20 billion in reserve
> for each of its regulated insurance subsidiaries at the time it was
> rescued by the U.S. on September 17, 2008, because of CDS trading in
> an unregulated portion of the company. That fact seems to be
> unanswerable vindication of the efficacy of state insurance
> regulation, which is even now *not* preempted by the CFMA. In November
> 2008, New York temporarily suspended the CDS mandate it had issued in
> September on the theory that the prospects for federal regulation had
> improved.[^54] On January 24, 2009, the National Conference of
> Insurance Legislators is holding a hearing in New York City to discuss
> whether CDS should be subject to state regulation. My view is that
> state efforts in this should be encouraged as a further safeguard
> against systemic risk, especially insofar as the CFMA itself did not
> preempt state insurance laws. The CFMA limited its preemptive effect
> to state gaming and bucket shop laws.
>
> As some commentators have also made clear, the New York Insurance
> Superintendant's proposed extension to of New York insurance law
> relating to those seeking to indemnify actual risks from the actual
> holding of CDOs is too limited. "Naked" CDS, or the guarantees to
> counterparties who hold *no* CDO risk and who just want to bet against
> mortgage commitments being fulfilled, are the kind of insurance that
> led to the creation of state insurance laws.[^55] Under state
> insurance laws, you cannot insure against someone else's risk.
> Insurance of that kind creates so-called "moral hazard," or the
> creation of perverse and nonproductive incentives to take actions that
> will lead to the triggering of the insurance guarantee. For example,
> the holder of a "naked" CDS might want to interfere with mortgage
> "work outs" to avoid defaults on loans, thereby insuring that the
> "guarantee" against loan default within the naked CDS will be
> triggered. Accordingly, if states are to regulate here, they should
> bar "naked" CDS as the very kind of unlawful insurance that caused
> regulation in this area.
>
> Finally, there is a strong "regulatory reform" movement to preempt
> some or all of state insurance law in favor of a federal insurance
> regulator.[^56] If the states "stand down" on the CDS market, i.e.,
> consciously decide not to regulate products that have all the elements
> of insurance, in favor of exclusive federal regulation, that will be
> the first exhibit used by those advocating federal regulation as to
> the purported inadequacy of state regulation. CDS represent class
> insurance products.[^57]
>
> *Structural Regulation Alone*. A further school of thought, most
> clearly evidenced by the President's Working Group on Financial
> Markets "regulatory reform" proposal of March 2008, is that the
> present regulatory failures have been caused by structural
> inadequacies, e.g., too many regulators looking at huge institutions
> carrying out in a single structure a host of financial
> activities.[^58] The March 2008 proposal was intended to mimic the
> U.K.'s then extant unified regulatory structure that was premised on
> "principles" rather than "rules." For example, the March 2008 proposal
> would merge the CFTC into the SEC, but have the SEC use the CFTC's
> "principles" based regulation. Moreover, the March 2008 proposal would
> hand over to the Fed considerable consolidated "rescue" powers. It may
> very well be that there needs to be a restructuring of the federal
> regulatory system. However, the adverse lesson emanating from the
> creation of the Department of Homeland Security should be an object
> lesson in the dangers of governmental reorganization in a time of
> crisis. More importantly, it is not enough to improve federal "rescue"
> capabilities. There are neither principles nor rules that govern the
> OTC derivatives market. It is a "blackhole." Even the U.K. is
> "reforming" its regulatory structure, recognizing that it was
> inadequate to the task in the present meltdown.

![](media/image1.jpeg){width="6.402083333333334in"
height="10.344444444444445in"}

**Professor Michael Greenberger**

Since July 2001, Michael Greenberger has been a professor at the
University of Maryland School of Law, where he teaches a course entitled
"Futures, Options and Derivatives." Professor Greenberger was a partner
for more than 20 years in the Washington, D.C. law firm of Shea &
Gardner, where he served as lead litigation counsel before courts of law
nationwide, including the United States Supreme Court.

In 1997, Professor Greenberger left private practice to become the
Director of the Division of Trading and Markets at the Commodity Futures
Trading Commission (CFTC). In that capacity, he was responsible for
supervising exchange traded futures and derivatives. He also served on
the Steering Committee of the President's Working Group on Financial
Markets, and as a member of the International Organization of Securities
Commissions' Hedge Fund Task Force. After service at the CFTC, Professor
Greenberger served as Counselor to the United States Attorney General in
1999, and then became the Justice Department's Principal Deputy
Associate Attorney General.

While in the Justice Department, Professor Greenberger was responsible
for supervising a number of counterterrorism programs. In May 2002,
Professor Greenberger became the founding director of the University of
Maryland Center for Health and Homeland Security (CHHS), which now has a
staff of 55 professionals working on a broad range of homeland security
and emergency response issues for federal, state and local government
agencies, as well as medical researchers. More information about CHHS
can be found on the Center's website,
[www.umaryland.edu/healthsecurity](http://www.umaryland.edu/healthsecurity).

![](media/image2.jpeg){width="6.054861111111111in"
height="9.432638888888889in"}§

[^1]: David Cho, "House Passes Bill Bolstering Oil Trade Regulator",
    Wash. Post, June 27, 2008, at D8 *available at*
    http://www.washingtonpost.com/wp-dyn/content/article/2008/06/26/AR2008062604005.html.

[^2]: Commodity Markets Transparency and Accountability Act, 110^th^
    Cong. (2008) *available at*
    http://thomas.loc.gov/cgi-bin/bdquery/z?d110:HR06604:@@@R.

[^3]: Michael Masters, Adam White, The Accidental Hunt Brothers (July
    31, 2008) *available at* <http://accidentalhuntbrothers.com/>
    (stating "\[t\]he total open interest of the 25 largest and most
    important commodities, upon which the indices are based, was \$183
    billion in 2004. From the beginning of 2004 to today, Index
    Speculators have poured \$173 billion into these 25 commodities.");
    Maher Chymaytelli, Opec Calls for Curbing Oil Speculation, Blames
    Funds, January 28, 2009, *available at*
    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aw4VozXUOVwU
    (stating "Oil surged 46 percent in the first half of 2008 to a
    record \$147.27 only to plunge by the end of the year... So-called
    net-long positions in New York crude futures by hedge funds and
    other large speculators betting on higher prices peaked at 115,145
    contracts in March, according to data from the CFTC. They switched
    direction in July to a net-short position, or wager against prices,
    which reached 52,984 contracts by mid- November, the CFTC data
    show... Oil futures traded 6 cents down at \$41.52 a barrel on the
    New York Mercantile....down 72 percent from last year's record.");
    The Price of Oil. (January 11, 2009). CBS: 60 Minutes

[^4]: Clifford Kraus, "Where Is Oil going Next, New York Times (January
    14, 2009) B1 at
    http://www.nytimes.com/2009/01/15/business/worldbusiness/15oil.html

[^5]: *Id.*

[^6]: *The Role of Financial Derivatives in the Current Financial
    Crisis: Hearing before the Senate Agricultural Comm., 110^th^ Cong.
    at 3 (October 14, 2008) (*written testimony of *Eric Dinallo,
    Superintendent, New York State Insurance Dept.) available at*
    http://www.ins.state.ny.us/speeches/pdf/sp0810141.pdf.

[^7]: *The Role of Financial Derivatives in the Current Financial
    Crisis: Hearing before the Senate Agricultural Comm., 110^th^ Cong.
    (October 14, 2008)* (stating "by 2000 we engaged in the Commodities
    Futures Modernization Act, which specifically did a few things. It
    made credit default swaps not a security, so it couldn\'t be
    regulated as a security; as you said, put it out of reach of the
    CFTC; and it said this act shall supersede and preempt the
    application of any state or local law that prohibits or regulates
    gaming or the operation of bucket shops.")

[^8]: David Leonhardt, The Big Fix, N.Y. T[imes]{.smallcaps} (February
    1, 2009), (stating that "the debt that the federal government has
    already accumulated \[...\] is equal to about \$6 trillion, or 40
    percent of G.D.P. \[...\] The bailout, the stimulus and the rest of
    the deficits over the next two years will probably add about 15
    percent of G.D.P. to the debt. That will take debt to almost 60
    percent, which is above its long-term average but well below the
    levels of the 1950s. But the unfinanced parts of Medicare, the
    spending that the government has promised over and above the taxes
    it will collect in the coming decades requires another decimal
    place. They are equal to more than 200 percent of current G.D.P.")

[^9]: *The Role of Credit Derivatives in the U.S. Economy: Hearing
    Before the House Comm. on Agriculture*, 110^th^ Cong. (December 8,
    2008).

[^10]: *The Role of Credit Derivatives in the U.S. Economy: Hearing
    Before the House Comm. on Agriculture*, 110^th^ Cong. (November 20,
    2008).

[^11]: *The Role of Credit Derivatives in the U.S. Economy: Hearing
    Before the House Comm. on Agriculture*, 110^th^ Cong. (October 15,
    2008).

[^12]: *Role of Financial Derivatives in Current Financial Crisis:
    Hearing Before* *Senate Agricultural Comm., 110^th^ Cong. (October
    14, 2008).*

[^13]: *The Role of Credit Derivatives in the U.S. Economy: Hearing
    Before the House Comm. on Agriculture*, 110^th^ Cong. (November 20,
    2008).

[^14]: To Review Legislation Amending the Commodity Exchange Act:
    *Hearing Before the House Comm. on Agriculture, 110^th^ Cong. (July
    10, 2008).*

[^15]: Paul A. Volcker, Address to the Economic Club of New York, at 1-2
    (April 8, 2008) available at
    econclubny.org/files/Transcript_Volcker_April_2008.pdf).

[^16]: [Congressional Oversight Panel]{.smallcaps}, [111^th^
    Cong.]{.smallcaps}, [Special Report on Regulatory Reform:
    Modernizing the American Financial Regulatory System:
    Recommendations for Improving Oversight, Protecting Consumers, and
    Ensuring Stability (2009).]{.smallcaps}

[^17]: Goodman, The Reckoning: Taking Hard New Look at a Greenspan
    Legacy, N.Y. Times (October 9, 2008) available at
    http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?pagewanted=1&\_r=1;

    Michael Hirsh, The Great Clash of \'09: A looming battle over
    re-regulation, Newsweek, (December 24, 2008) available at
    http://www.newsweek.com/id/176830**.**

[^18]: [Congressional Oversight Panel]{.smallcaps}, [111^th^
    Cong.]{.smallcaps}, [Special Report on Regulatory Reform:
    Modernizing the American Financial Regulatory System:
    Recommendations for Improving Oversight, Protecting Consumers, and
    Ensuring Stability. (2009)]{.smallcaps} at 7 (quoting former Federal
    Reserve Chairman Alan Greenspan "Those of us who have looked to the
    self-interest of lending institutions to protect shareholders'
    equity, myself included, are in a state of shocked disbelief."

[^19]: O'Harrow and Denis, *Downgrades and Downfall*, Washington Post
    (December 31, 2008) A1 (stating "The regulatory blackhole for
    credit-default swaps is one of the most significant issues we are
    confronting on the current credit crisis,' Cox said, 'it is requires
    immediate legislative action.").

[^20]: *The Role of Financial Derivatives in the Current Financial
    Crisis: Hearing before the SENATE AGRICULTURAL Comm., 110^th^ Cong.
    3 (October 14, 2008) (opening statement of Eric Dinallo,
    Superintendent, New York State Insurance Dept.)* (stating "We
    engaged in the ultimate moral hazard... no one owned the downside of
    their underwriting decisions, because the banks passed it to the
    Wall Street, that securitized it; then investors bought it in the
    form of CDOs; and then they took out CDSs. And nowhere in that chain
    did anyone say, you must own that risk.").

[^21]: Matthew Leising, Bloomberg.com, "Peterson Plans Bill to Force
    Credit Default Swaps Clearing"(December 15, 2008).

[^22]: 17 C.R.F. Part 35 (1993).

[^23]: *The Derivatives Trading Integrity Act,* 111^th^ Cong. (January
    15, 2009); Senate Agriculture Comm., Statement of Chairman Tom
    Harkin: Role of Financial Derivatives in the Current Financial
    Crisis (Oct. 14, 2008); Posting of James Hamilton to Jim Hamilton's
    World of Securities Regulation,
    http://jimhamiltonblog.blogspot.com/2009/01/senate-bill-would-regulate-otc.html
    (Jan. 17, 2009, 14:58) (stating "\[t\]he broad goal of the \[Senator
    Harkin's\] legislation is to establish the standard that all futures
    contracts trade on regulated exchanges.").

[^24]: Lisa Brennan, "Exchange Rules Should Apply to Derivatives, NYSE
    Says" (Bloomberg, February 2, 2009).

[^25]: *The Role of Financial Derivatives in the Current Financial
    Crisis: Hearing before the Senate Agricultural Comm., 110^th^ Cong.
    3 (October 14, 2008)*.

[^26]: Press Release, Commodity Futures Trading Commission, CFTC
    Announces That CME Has Certified a Proposal to Clear Credit Default
    Swaps (Dec. 23, 2008) *available at*
    http://www.cftc.gov/newsroom/generalpressreleases/2008/pr5592-08.html.

[^27]: *Id.*

[^28]: Order Granting the London Clearing House\'s Petition for an
    Exemption Pursuant to Section 4(c) of the Commodity Exchange Act, 64
    Fed. Reg. 53346-64 (October 1, 1999).

[^29]: Johnson & Hazen, Derivatives Reg., section 1.18\[6\]\[B\] at p.
    332 (2004 ed.) "\[U\]nlike excluded transaction, with exempt
    off-exchange transactions \[, exempted transactions and swaps
    transactions\], the CFTC retains its enforcement authority in case
    of fraud or market manipulation." Interpretation of CEA §§2(c), 2(d)
    and 2(g).

[^30]: Patrick M. Parkinson, Statement of Testimony before the Committee
    on Agriculture United States House of Representatives on November
    20, 2008, he stated that "We \[the CFTC, SEC, and Federal Reserve\]
    have been jointly examining the risk management and financial
    resources of the two organizations that will be supervised by U.S.
    authorities against the 'Recommendations for Central
    Counterparties,' a set of international standards that were agreed
    to in 2004 by the Committee on Payment and Settlement Systems of the
    central banks of the Group of 10 countries and the Technical
    Committee of the International Organization of Securities
    Commissions," *available at*
    <http://agriculture.house.gov/testimony/110/h91120/Parkinson.pdf>.

[^31]:

[^32]: *Supra* at n. 3.

[^33]: See S.3044, "Consumer-First Energy Act", 110th Congress,
    Sponsored by Sen. Henry Reid. See Also S.3248, "Commodity
    Speculation Reform Act", 110thCongress, Sponsored Sen. Joseph
    Lieberman, Sen. Christopher Bond, Sen. Maria Cantwell and Sen. Susan
    Collins. \"

[^34]: Record Vote Number: 146, 110th Congress (June 10th, 2008).
    Cloture motion rejected -- 51 Yeas, 43 Nays, 6 Not voting. The four
    supporting republicans were, Collins (R-ME), Smith (R-OR), Snowe
    (R-ME) and Warner (R-VA).

[^35]: *Supra* at n. 24.

[^36]: *Compare* 7 U.S.C. § 7a (b)(3)(B)(iv) (2008) (stating the minimum
    net capital requirements for a party to trade on a registered DTEF)
    *and* 7 U.S.C. § 7a (c)(4) (2008) (mandating that DTEF boards of
    trade must "establish and enforce rules or terms and conditions
    providing for the financial integrity" of both participants and
    transactions entered on or through the board of trade) *to* 7 U.S.C.
    § 7a-1 (c)(2)(C)(i) (2008) (merely requiring "appropriate minimum
    financial requirements" for admission and continued eligibility, but
    providing no explicit standards).

[^37]: Intermediaries, such as futures commission merchants, depository
    institutions, and Farm Credit System Institutions, must meet certain
    requirements in order to interact with a DTEF. 7 U.S.C. § 7a (e)(1)
    (2008). The intermediary must be in good standing with the SEC or
    the Federal bank regulatory agencies (whichever is appropriate. 7
    U.S.C. § 7a (e)(2)(A) (2008). Additionally, if the intermediary
    holds customer funds for more than a day, it must be registered as
    futures commission merchant and must be a member of a registered
    futures association. 7 U.S.C. § 7a (e)(2)(B) (2008). There is no
    statutory equivalent for DCOs concerning FCMs, depository
    institutions Farm Credit Institutions, or any other type of
    intermediary. *See generally* 7 U.S.C. § 7a-1 (2008).

[^38]: *See* 7 U.S.C. § 7a (d)(7) (2008) (stating that "the board of
    trade shall establish and enforce appropriate fitness standards for
    directors, members of any disciplinary committee, members, and any
    other persons with direct access to the facility, including any
    parties affiliated with any of the persons described in this
    \[statute\]."). There is no comparable requirement for DCOs. *See
    generally* 7 U.S.C. § 7a-1 (2008).

[^39]: 7 U.S.C. § 7a-1 (c)(2)(I)(ii) (2008) (requiring the maintenance
    of emergency procedures , a disaster recovery plan, and periodic
    testing of backup facilities, but not the establishment of a
    contingency plan to deal with economic emergencies).

[^40]: While both DTEFs and DCOs have various requirements that they are
    responsible for carrying out, it is only in the context DTEFs that
    the concept of "self regulation" is expressly addressed. *See* 7
    U.S.C. § 7a (b)(2)(E) (2008) (noting that the Commission will
    consider the entities history of this self regulation when
    determining if there is a threat of manipulation); *see, e.g.,* 7
    U.S.C. § 7a (d)(2008) (explaining the core principles and explicit
    duties of a DTEF); 7 U.S.C. § 7a-1 (c)(2) (2008) (listing in broad
    terms the responsibilities of a DCO).

[^41]: However, it is worth noting that:

    > a board of trade may elect to operate as a registered derivatives
    > transaction execution facility if the facility is\--

    \(1\) designated as a contract market and meets the requirements of
    this section; or

    \(2\) registered as a derivatives transaction execution facility
    under subsection (c) of this section.

    7 U.S.C. § 7a (a)(1)-(2) (2008).

    If the DTEF chose to operation under section (1), it follows that
    the board of trade would be obligated to follow all of the
    requirements for a DCM.

[^42]: See, Bank for International Settlements, BIS Quarterly Review
    (September, 2008), *available at*
    http://www.bis.org/publ/qtrpdf/r_qa0809.pdf#page=108

[^43]: *Id.*

[^44]: See, e.g., Johnson & Hazen, Derivatives Regulation, § 1.17 at
    41-49 (2009 Cum. Supp.)

[^45]: "'The regulatory blackhole for credit-default swaps is one of the
    most significant issues we are confronting on the current credit
    crisis,' Cox said, 'it is requires immediate legislative action.'"
    O'Harrow and Denis, Downgrades and Downfall, Washington Post
    (December 31, 2008) A1.

[^46]: Goodman, The Reckoning: Taking Hard New Look at a Greenspan
    Legacy (October 9, 2008) A1;
    http://mobile.newsweek.com/detail.jsp?key=39919&rc=camp2008&p=0&all=1

[^47]: Johnson & Hazen, Derivatives Regulation, §4.04\[11\] at 975 (2004
    ed) referencing 7 U.S.C. § 16 (e) (2).

[^48]: GAO Report, supra note 17, at 31; Press Release, Federal Reserve,
    Nov. 25, 2008, *available at*
    http://www.federalreserve.gov/newsevents/press/monetary/20081125a.htm

[^49]: 17 C.R.F. Part 35 (1993).

[^50]: 63 Fed. Reg. 26114 (May 12, 1998)

[^51]: *See* Speech by SEC Chairman Christopher Cox: Opening Remarks at
    SEC Roundtable on Modernizing the Securities and Exchange
    Commission's Disclosure System (Oct. 8, 2008).

[^52]: Lynch, Harkin Seeks to Force All Derivatives on Exchanges, Wall
    Street Journal November 20, 2008 at
    http://online.wsj.com/article/SB122721812727545583.html. See also
    Hunton & Williams LLP, *The Derivatives Trading Integrity Act -
    Beginning of the End for OTC Trading?,* December 2008, *available
    at*
    [http://www.hunton.com/files/tbl_s10News%5CFileUpload44%5C15843%5Cderivatives_trading_integrity_act.pdf](http://www.hunton.com/files/tbl_s10News\FileUpload44\15843\derivatives_trading_integrity_act.pdf) (
    \"Senate Agriculture Committee Chairman Tom Harkin (D-Iowa)
    introduced the Derivatives Trading Integrity Act of 2008 (\"the
    Bill\"), hoping to end \"casino capitalism\" in the market for
    over-the-counter (OTC) derivatives. The Bill amends the Commodity
    Exchange Act (CEA) to require that all contracts with future
    delivery trade on regulated exchanges similar to how commodity
    futures currently trade\...The Bill reverses \[the CFMA\], forcing
    swap transactions to be conducted on designated or registered
    clearing houses or derivatives clearing organizations.\").

[^53]: New York State Insurance Dept., Recognizing Progress By Federal
    Government In Developing Oversight Framework For Credit Default
    Swaps, New York Will Stay Plan To Regulate Some Credit Default
    Swaps, press release, November 20, 2008  (\"Dinallo announced that
    New York had determined that some credit default swaps were subject
    to regulation under state insurance law and that the New York State
    Insurance Department would begin to regulate them on January 1,
    2009.\").

[^54]: New York State Insurance Dept., Recognizing Progress By Federal
    Government In Developing Oversight Framework For Credit Default
    Swaps, New York Will Stay Plan To Regulate Some Credit Default
    Swaps, press release, November 20, 2008  (Superintendent Dinallo
    stating \"I am pleased to see that our strong stand has encouraged
    the industry and the federal government to begin developing
    comprehensive solutions. Accordingly, we will delay indefinitely
    regulating part of the market.\").

[^55]: Kimbal-Stanley, Arthur , *Dissecting A Strange Financial
    Creature,* The Providence Journal*,* April 7, 2008 (\"Insurance
    contracts used to protect against the loss of property owned by the
    person buying the policy helped the buyer eliminate the consequences
    of calamity. Insurance contracts used to bet on whether or not
    calamity would befall someone else\'s property not only let the
    buyer place a bet, it gave the buyer incentive to make that calamity
    occur, to destroy the insured property he did not own, to sink the
    other guy\'s ship, in order to collect on an insurance contract. In
    1746, Parliament passed the Marine Insurance Act, requiring anyone
    seeking to collect on an insurance contract to have an interest in
    the continued existence of the insured property. Thus was born the
    insured-interest doctrine....The doctrines have been part of
    insurance law in both England and the United States (which in 1746
    were colonies under English common law) ever since.\").

[^56]: Insurance Journal, *AIG Crisis Restarts Debate Over State vs.
    Federal Insurance Regulation*, September 17 2008, *available at*
    <http://www.insurancejournal.com/news/national/2008/09/17/93798.htm?print=1>

[^57]:

[^58]: http://www.ustreas.gov/press/releases/reports/pwgpolicystatemktturmoil_03122008.pdf