Comment Text:
Re: CFTC proposal governing foreign derivatives
Unregulated trading in complex derivatives has been at the center of a succession of financial scandals ranging from Long Term Capital Management and Enron in the 1990s to the disastrous 2008 financial crisis. For the first time, the Dodd-Frank Act promised to bring a set of rules and a degree of transparency to the shadowy world of derivatives.
Now that achievement is under threat. Wall Street banks and other firms are lobbying to exempt trades conducted through their foreign affiliates. The loopholes they propose would once again provide no oversight for the kind of trades associated with the AIG and JP Morgan Chase debacles. (Both firms conducted much of their derivatives dealing in London.) Research by Bloomberg shows that over half of derivatives trades by big Wall Street banks are typically conducted through foreign affiliates.
I would like to comment on a recent CFTC proposal governing the treatment of derivatives trading by foreign affiliates of U.S. companies. Under this weak proposal, companies could potentially escape oversight by channeling money through regulatory havens just as they escape taxes by channeling money through tax havens. (Indeed, the Cayman Islands was the nominal site of most of the derivatives deals responsible for Long Term Capital Management disaster in the 1990s.) Industry proposals would also allow a company to evade regulation if it could argue that the activities of a subsidiary were “not guaranteed,” creating a field day for lawyers and a huge threat to U.S. taxpayers.
Sincerely, -David Gurarie
