United States Senate
Washington, DC 20510
May 14, 2010
Re: Cantwell Amendment #3950 to Restoring Financial Stability Act of 2010 to make illegal derivatives contracts unenforceable
Dear Senator:
The over 250 consumer, employee, investor, community and civil rights groups who are members of Americans for Financial Reform (AFR) write to express strong support for Amendment No. 3950 to S. 3217 offered by Senator Cantwell. The bill, as currently proposed, has strong provisions to make clearing mandatory but virtually no way to reprimand parties who may openly defy that clearing requirement. Senator Cantwell’s amendment closes this critical loophole.
The derivatives regulation amendments that Senators Lincoln and Dodd have incorporated into the “Restoring Financial Stability Act of 2010” bring a critically important measure of regulation over dangerous derivates and swaps products by requiring: exchange-trading and clearing of most standard derivatives; the prudential regulation of major swaps dealers, including capital reserves requirements and business conduct rules; the spinning off of risky swaps desks from systemically risky banks; and, the ability of regulators to ban swaps that lead to financial instability or have no real economic purpose.
Despite a multitude of carefully crafted requirements to ensure that these transactions are adequately capitalized and fully transparent, one single section of that bill has the potential to unravel the entire regulatory infrastructure. Section 739 (“Legal Certainty for Swaps”) provides that even if a swap is executed after the Act’s passage, and traded in violation of the Act’s mandatory clearing requirements, that swap, nevertheless, cannot be voided or declared unenforceable. We are presently unaware of any legislation that imposes regulations but then forgives the failure to follow those regulations by sanctifying the very conduct deemed illegal. It defies all imagination that Congress could, on the one hand, impose a regulatory framework to prevent future bail outs to Wall Street, while, on the other hand, fail to impose any meaningful consequences for those who do not comply with the regulations.
The anti-voiding language of Section 739 is unnecessary for the benign objective of safeguarding contracts from non-material and technical illegalities. Contract law already does that. Section 739 should be considered in light of its real objective when it was inserted into the CFMA of 2000 – namely, to shield highly risky and illegal transactions from traditional legal remedies.
We urge you to support Amendment 3950 and close this loophole in Title VII of the bill. It will serve as a deterrent to the kind of Wild West Wall Street conduct that brought the American taxpayer and the world economy to its knees.
Please contact Lisa Lindsley, Director, Capital Strategies, AFSCME, for more information: 202.429.1275 or llindsley@afscme.org.
Sincerely,
Americans for Financial Reform