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The woman who just pulled out of Treasury nomination.. Annette Nazareth

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Joanne98 Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Mar-07-09 06:21 AM
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The woman who just pulled out of Treasury nomination.. Annette Nazareth
Here's her testimony from 2000 where she is promoting the use of OTC derivatives! Interesting. Maybe she pulled out because she thinks she may go to jail!

Testimony of
Annette L. Nazareth, Director Division of Market Regulation
Before the Senate Committee on Agriculture, Nutrition, and Forestry,
re: The Report to Congress on Over-The-Counter Derivatives Markets and The Commodity Exchange Act by The President's Working Group on Financial Markets

February 10, 2000

Chairman Lugar and Members of the Committee:

I am pleased to appear today to testify on behalf of the Securities and Exchange Commission ("SEC" or "Commission") as you consider issues pertaining to the reauthorization of the Commodity Futures Trading Commission ("CFTC"). My testimony focuses on the Report on Over-the-Counter Derivatives Markets and the Commodity Exchange Act1 ("OTC Derivatives Report"), which the President's Working Group on Financial Markets ("Working Group") submitted to Congress last November.2

As you know, the application of the Commodity Exchange Act ("CEA") to transactions involving over-the-counter ("OTC") derivative instruments raises significant questions of public policy. The Commission has welcomed the opportunity to study some of these questions in coordination with other members of the Working Group. The rapid evolution of OTC derivatives markets requires a regulatory approach that promotes greater legal certainty as well as innovative financial instruments. The Working Group's Report and its recommendations represent an important step toward this goal.

I. The Growth of OTC Derivatives Market
It is widely recognized that OTC derivative instruments are important financial management tools that, in many respects, reflect the unique strength and innovation of American capital markets. Indeed, U.S. markets and market professionals have been global leaders in derivatives technology and development.

OTC derivative instruments provide significant benefits to corporations, financial institutions, and institutional investors by allowing them to isolate and manage risks associated with their business activities or their financial assets. These instruments, for example, can be used by corporations and local governments to lower funding costs, or by multinational corporations to reduce exposure to fluctuating exchange rates. Because of the range of benefits these products offer, the OTC derivatives market has grown tremendously during the past two decades. According to data from the Bank for International Settlements, at the end of June 1999, the total estimated notional amount of outstanding OTC derivative contracts was $81.5 trillion.3

II. Findings and Recommendations of the OTC Derivatives Report
In preparing the OTC Derivatives Report, the Working Group's task was fairly specific: to focus on how a particular piece of legislation, the CEA, might be modified to address issues related to OTC derivatives markets. Accordingly, the Report makes recommendations in several areas.

Swap Agreements
Regulators have focused on the treatment of swaps for over a decade. In 1989, the CFTC issued a Policy Statement, noting that "most swap transactions, although possessing elements of futures or options contracts, are not appropriately regulated as such under the and regulations."4 After receiving exemptive authority under the Futures Trading Practices Act of 1992,5 the CFTC followed up with its 1993 Swap Exemption.6 Notwithstanding the Exemption's relief for some transactions, concerns arose about its scope. Because Congress did not explicitly determine whether swaps fell under the CEA absent such an exemption, the status of swaps remains unclear.

In light of this legal uncertainty, the OTC Derivatives Report recommends that Congress amend the CEA to exclude bilateral swap agreements (other than transactions involving non-financial commodities with finite supplies) between eligible swap participants, acting on a principal-to-principal basis, provided that the transactions are not conducted on a multilateral transaction execution facility ("MTEF").7 The Commission believes that excluding qualifying instruments from the CEA should create greater legal certainty than the current approach that merely provides for the possibility of exemption, thus leaving open the question of whether such instruments are futures.

Electronic Trading Systems
In addition to focusing on the regulatory treatment of particular instruments, the OTC Derivatives Report explores questions raised when electronic systems facilitate the trading of OTC derivatives. It is worrisome that legal uncertainty might hinder technological development in the OTC derivatives market since technological innovation could promote transparency and efficiency. Moreover, the use of technology could help firms to apply more reliable internal controls on traders and to reduce risk.

The OTC Derivatives Report therefore recommends that Congress amend the CEA to exclude certain types of electronic trading systems for derivatives, provided that the systems limit participation to sophisticated counterparties trading for their own accounts and are not used to trade contracts that involve non-financial commodities with finite supplies. Systems clearly not covered by the definition of MTEF in the current Swap Exemption would be covered by this exclusion. The exclusion would also cover systems that assist eligible swap participants communicating about or negotiating bilateral agreements. In addition, the exclusion would cover systems (including ones where bids and offers are open to all participants) where: first, the system only allows participants to act solely for their own account, and, second, the system is not used to enter into agreements requiring a party to make physical delivery of a non-financial commodity with a finite supply.

Moreover, to avoid disadvantaging existing futures and commodities exchanges, those exchanges designated by the CFTC as contract markets also would be permitted to establish these kinds of electronic trading systems for swaps.

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no_hypocrisy Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Mar-07-09 07:19 AM
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1. Here is the seminal problem as found in the OP:
Edited on Sat Mar-07-09 07:19 AM by no_hypocrisy
OTC derivative instruments provide significant benefits to corporations, financial institutions, and institutional investors by allowing them to isolate and manage risks associated with their business activities or their financial assets.

The whole concept of taking risks with other people or institutions' money without the responsibility is why the OTC derivatives were irresistible. Nobody thought to worry who would eventually have to pay for worthless products.
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