Chairman Dick Lugar, U.S. Senator for Indiana

 
Senate Agriculture Committee CFTC Hearing

 
Today’s hearing will deal with swaps and other over-the-counter derivatives.  Its purpose is twofold.

 First, our hearing invites the relevant federal agencies to discuss their current thinking on whether and how OTC derivatives should be regulated.  The agencies will report their progress on two related studies, one dealing with derivatives and the other with hedge funds.

 Second, the agencies and other witnesses will offer their views on recent events in the financial markets – in particular, the near-collapse of Long Term Capital Management, which precipitated the hedge fund study I mentioned a moment ago.

 We are holding the hearing during what is normally the off-season for Congress.  We are doing so because after the Commodity Futures Trading Commission issued a concept release on swaps in May, many public and private leaders in the financial community expressed alarm over the legal uncertainty which the concept release injected into the swaps market.  1998 has been a year of substantial volatility in financial markets. This hearing is another attempt to provide a degree of certainty in the area of our committee’s oversight authority.

 Congress has imposed a partial moratorium on any CFTC swaps rulemaking until the end of March 1999.  The moratorium contains exceptions for market emergencies and some other circumstances.  Congress acted at the request of the Clinton Administration, the Board of Governors of the Federal Reserve System and the Securities and Exchange Commission.  Public statements by three of the five CFTC commissioners indicated agreement with a regulatory standstill.

 Along with my Senate colleagues, I have studied the implications of the LTCM fiasco.  I find little evidence to suggest that LTCM’s troubles arose primarily from the firm’s use of swaps.  Excessive leverage and lax lending standards seem to have played a more significant role.

 The LTCM affair may suggest the need for a regulatory response.  Additional disclosure of information to regulators may be appropriate.  More prudent practices on the part of lenders may also need to be encouraged or even required.

 Even if there is a need for some additional regulation or disclosure, the Commodity Exchange Act may not be the appropriate statutory authority for that regulation.  It seems more likely that the various banking regulators would be the appropriate agents of any new requirements.  However, I will withhold judgment on that point in order to give the Working Group a chance to arrive at its recommendations.  The Working Group will consider OTC derivatives broadly, not focusing exclusively on any single incident.

 Congress should make the fundamental decisions about whether and how OTC derivatives are to be regulated.  Only Congress can change the law, and I am convinced that without Congressional involvement, we will never get beyond the stale question “Are swaps futures?” and begin discussing the real public policy issues.

 Today, I will release a set of basic questions to help the committee prepare for reauthorization of the CFTC.  These questions will systematically explore the underlying purposes and objectives of futures and derivatives regulation.  Beginning in the spring, we will hold a series of hearings on reauthorization and related issues.  In late February, the committee will sponsor an informal public seminar to educate Senators, their staffs and the public about the major public policy questions involving futures and derivatives.

 Today’s topic is timely and our witnesses distinguished.  Following Senator Harkin’s opening statement, we will begin to hear from them.