CFTC Will Not Propose or Issue New Rules to Regulate Swaps, Hybrids

Jul 27, 1998

WASHINGTON D.C. — House Agriculture Committee Chairman Bob Smith (R-OR) today announced that Commodity Futures Trading Commission (CFTC) Chairperson Brooksley Born has notified him, in a July 24 letter, that the CFTC will not pursue regulation of over-the-counter (OTC) derivatives until Congress has the opportunity to act during CFTC reauthorization in 1999.

"As Chairperson Born states, the legal status of these financial instruments has not changed and, as we've noted before, Congress and the CFTC haven't determined whether swaps are futures contracts. This should put the controversy to bed. The CFTC has acted responsibly and I thank Chairperson Born for her leadership in this area," Smith said.

"It's been our position all along that the CFTC should delay any regulations until Congress has an opportunity to review the OTC derivatives market. I'm pleased to see that Chairperson Born now agrees and that the CFTC will not issue any rules until Congress has a chance to resolve the underlying questions," said Rep. Larry Combest (R-TX), Chairman of the Agriculture Subcommittee on Forestry, Resource Conservation, and Research.

"Government regulation is not necessarily the solution to issues within the derivatives market or any market for that matter. However, government oversight particularly with respect to antifraud and anti-manipulation measures is certainly appropriate. I'm glad to see the CFTC has recognized this and is delaying any proposals for rules and regulation of the derivatives market," said Rep. Tom Ewing (R-IL) Chairman of the Agriculture Subcommittee on Risk Management and Specialty Crops.

The Futures Trading Practices Act of 1992 gave the CFTC the authority to exempt certain off-exchange traded instruments from the Commodity Exchange Act (CEA). However, it was recognized at that time and in 1993 that other regulators, such as the Treasury, the Federal Reserve Board, and the Securities and Exchange Commission (SEC) have an interest in monitoring the OTC market.

On May 7, 1998, the CFTC issued a concept release intended to gather information and views on the OTC market to use in determining whether the current regulatory approach should continue or be modified. The concept release raised concerns that regulation preceding Congressional review would endanger the competitiveness of U.S. firms in the international financial derivatives market. The CFTC's action also raised jurisdictional questions among government regulators.

Smith represents Oregon's Second Congressional District — which includes most of eastern, southern, and central Oregon. Ewing represents Illinois' Fifteenth Congressional District -- which includes eleven counties in East-Central Illinois. Combest represents Texas' 19th Congressional District which includes the Panhandle, South Plains, and Permian Basin.