Grassley joins Democrats in backing regulation of derivatives markets

By James Q. Lynch 

The Gazette

Sen. Chuck Grassley joined Senate Ag Committee Democrats Wednesday in backing legislation to create more transparency in the derivatives market.

The tough regulations on derivatives, complex financial instruments many blame for the financial meltdown two years ago, will be part of a larger financial reform package the Senate Banking Committee is considering.

Grassley was the sole Republican to vote with Chairwoman Blanche Lincoln, an Arkansas Democrat, but said his vote to pass the bill out of committee does not mean he will vote for the overall financial reform bill.

“The derivatives piece is significant, but that larger bill has a number of flaws that need to be resolved before I'd support it,” he told reporters.

Grassley, who said he wants to see broad bipartisan support for the reform, criticized the White House for derailing bipartisan efforts in the Ag Committee. He said Lincoln and Sen. Saxby Chambliss, R-Ga., had worked for weeks on crafting bipartisan legislation.

Although the committee's derivative legislation was not perfect, Grassley supported it because of the need for greater transparency and accountability.

“The Lincoln bill is an important step in the right direction” because it prohibits taxpayer dollars being used to bailout firms that have engaged in risky derivatives deals,” Grassley said.

Derivatives are financial bets between private parties. Their value is derived from movements of an underlying asset. Some derivatives, such as oil futures contracts, already are regulated and trade on an exchange.

The ban would require banks to spin off divisions that trade in the lucrative but opaque financial instruments into free-standing subsidiaries.

The legislation would require trading in derivatives to take place, at a minimum, through clearinghouses, where there's a referee between private parties.

 “This market grew dramatically in the years before the 2008 financial crisis, and in 2007, the credit default swap market was valued at $600 trillion,” he said. “They were a major factor in the taxpayer bailout of AIG. And there is nothing in current law regarding derivatives.