Some Backup from Norman Carleton...
Norman Carleton:
OTC Derivatives, Rubin and Born: At the hearing, Rubin said he was concerned about the risks that OTC derivatives posed to the financial system when he was in the Clinton Administration. Having been in meetings with him when he was both head of the NEC and when he was Secretary, I can attest that this is true. He also said that he was concerned about legal issues that might threaten the market if the CFTC were to assert jurisdiction over the market. I was one of the Treasury staffers making this point at the time. Brooksley Born was undoubtedly right about the potential for problems with these instruments... [but] she... insisted that the Commodity Exchange Act be used as the applicable statute for regulating this market... effectively... to change the name of the Commodity Futures Trading Commission to something like the Derivatives Commission.... To some this would appear to be simply a turf fight, and it was partly that. The bank regulators and, to an extent, the SEC did not want the CFTC imposing rules and examining entities that they viewed as under their jurisdiction. But there was also a serious legal issue....
Simply put, the CFTC has exclusive jurisdiction over commodity futures and options contracts.... There is, however, no definition in the CEA of a futures contract.... If some swaps were commodity options, then they fell under the jurisdiction of the CFTC and were not legally permissible unless the CFTC had granted an exemption from the exchange trading requirement.... [I]f other swaps were... futures contracts... they were illegal and unenforceable.... The CFTC did not then have the authority to grant an exemption from the exchange trading requirement for futures contracts.... The CFTC under Wendy Gramm (wife of the Senator) had granted broad exemptions from the CEA... the contracts were legal and enforceable, that is, “legal certainty.” The CFTC... did not make a determination that the contracts fell under its jurisdiction; what it was in effect saying was that if these contracts were subject to the CEA, they were nevertheless legal and enforceable.... [However,] OTC contracts that were futures contracts on equity and other non-exempt securities were illegal and the CFTC did not have the authority to make them legal.... [I]f the CFTC claimed that it had authority over OTC derivatives then a subset of these contracts was in its view illegal....
Rubin had proposed to Born that, instead of the CFTC asking questions about the need for regulation of the OTC derivatives market, the President’s Working Group on Financial Markets issue the questions. Born point blank refused this suggestion, thus pushing Rubin into Greenspan’s camp, much to the relief of ISDA and other Wall Street groups lobbying on this issue.... Brooksley Born... could not compromise in face of the practical and political realities. While, not to make too fine a point about it, she has been proven right and Greenspan wrong about the dangers of the OTC derivatives market, Greenspan was the better politician...
So Rubin's position was:
- It would be nice to regulate derivatives.
- The benefits to regulating derivatives are not so large that it is worth doing so if that requires that firms find that they have to answer not just to the OCC and the Fed (if they are commercial banks) or to the SEC (if they are investment banks) but also to the CFTC. Thou shalt not multiply regulators beyond necessity.
