Committee Examines Role of Credit Derivatives in the U.S. Economy

Oct 15, 2008

WASHINGTON – Today, the House Agriculture Committee held a hearing to review the role of credit derivatives in the U.S. economy, and the role they may have played in the recent credit and financial crisis affecting markets around the world.

“We need to get a handle on these credit default swaps and determine the regulatory modifications that are needed to minimize the systemic risk to the economy that I am concerned they pose right now,” said House Agriculture Committee Chairman Collin C. Peterson of Minnesota. “There is an estimated $55 trillion in credit default swaps somewhere out there, but no one knows for sure if any of these swaps offset each other, exactly who is on the hook for these swaps, who is trading with who and on what terms; and worst of all, no one has any idea who is solvent and who is upside down. The first step we need to take is to shed some light on just how the unwinding of these obligations will take place.”>=

"Today's hearing was an opportunity for us to learn more about the role credit default swaps play in the marketplace, and how they contributed to the current economic crisis,” said Committee Ranking Member Bob Goodlatte of Virginia. “It is important for us to understand how our regulators are addressing this issue and what steps should be considered for providing greater transparency with credit default swaps and reducing systemic risk."

The hearing examined the role of credit derivatives, and credit default swaps in particular, and the role they may have played in the series of recent failures and government takeovers of large financial institutions that engage in credit derivative transactions, including American International Group (AIG), Lehman Brothers, Bear Stearns, and Washington Mutual, among others.

The credit derivative market has grown dramatically over the last 15 years, with credit default swaps accounting for the most widely used derivative product by volume. The notional amount of credit derivatives is estimated to exceed $55 trillion.

The Committee heard testimony from two panels of witnesses, comprised of government regulators, academics, and industry stakeholders. The panelists testified about the current regulatory structure for regulated exchange and over the counter derivatives markets as well as possible arrangements for the clearing of credit default swaps.

Witness testimony is available on the Committee website, and a full transcript of the hearing will be posted on the Committee website at a later date.


Panel 1

The Honorable Walter Lukken, Acting Chairman, Commodity Futures Trading Commission, Washington, D.C.

Mr. Erik R. Sirri, Director of Division of Trading and Markets, Securities Exchange Commission, Washington, D.C.

Panel 2

Mr. Robert Pickel, Chief Executive Officer, International Swaps and Derivatives Association, Washington, D.C.

Professor Henry Hu, Professor, University of Texas School of Law, Austin, Texas

Mr. Johnathan Short, Vice President and General Counsel, Intercontinental Exchange, Atlanta, Georgia

Ms. Kim Taylor, Managing Director and President, CME Group Clearinghouse, Chicago, Illinois