This was a vote on an amendment offered by Rep. Stupak (D-MI) that would have required all financial transactions known as “swaps” to be executed on an exchange that had registered with the Securities and Exchange Commission. A “swap” is a financial contract that can be used to lock in the future price for a commodity or as a form of financial insurance; participating in one can sometimes place an entity in a financially risky position. The requirement that swaps be traded on an exchange registered with the Commission was designed to promote the control and standardization of these transactions. The amendment was offered to H.R. 4173, a major financial reform bill which implemented the most significant changes in the regulation of the financial industry since The Great Depression.
Stupak noted that the purpose of H.R. 4173 was to provide a “comprehensive and thorough regulation of the financial sector”. However, he added that “it would be meaningless if we continue to leave loopholes in place to evade regulation.” He noted that “swaps” represent a huge amount of financial transactions, but that the vast majority of them are traded “in unregulated dark markets (and) . . . (T)hese unregulated markets create a systemic risk across the financial system and helped bring Lehman Brothers, Bear Stearns and AIG into bankruptcy and our economy to the verge of disaster.”
Stupak said: “The best way to address this problem is to require Wall Street financial houses to post collateral and clear their swaps contracts on regulated exchanges . . . we should at least require that these trades be made in the open, transparent markets.” He said his amendment “establishes a simple requirement (that swaps) . . . be reported on an exchange (to insure) . . . a competitive, transparent market.” He quoted the recent testimony of a federal regulator that “lack of regulation in these (swap) markets has created significant information deficits''. Americans for Financial Reform, a coalition of progressive organizations, including The AFL-CIO, The Consumer Federation of America and AARP expressed its support for the amendment on its web site. The site included the statement that passage of the amendment would provide “greater transparency to market participants.”
A consumer protection organization known as Stop Oil Speculation Now also expressed its support for the amendment on its web site. The site included the statement that the use of swaps encourages “reckless speculation (that) artificially raises the price of gasoline . . , (and the Stupak Amendment would) increase transparency and close known loopholes in the regulation of commodities futures markets.”
Rep Lucas (R-OK) opposed the amendment. Lucas first asked:”What risk is this amendment looking to eliminate?” He noted that the financial reform legislation already contained language recognizing “that there are swaps that need not go through the cost and formality of . . . an exchange or swap execution facility. As long as the regulator can see the swap and has the appropriate tools to mitigate risk to the U.S. financial system, what more does the exchange execution requirement add?” Lucas also argued: “Forcing these swaps to be executed on an exchange will only artificially increase the cost of managing risk or (will) discourage legitimate risk management activity altogether.”
Rep. Peterson (D-MN), the chairman of the committee that has jurisdiction over the regulation of swaps, opposed the amendment. He first acknowledged that: “In theory, this (amendment) all makes sense.” His opposition was based in part on the fact that many of those with who use swaps as financial management tools were concerned that the passage of the amendment would interfere with the normal operation of the swap market. These included members of the American Gas Association, the Public Gas Association, and the Public Power Association, as well as 3M, Cargill, John Deere, and Caterpillar.
The amendment was defeated by a vote of 98-330. Ninety-five Democrats, including a majority of the most progressive Members, and three Republican voted “aye”. One hundred and seventy Republicans and one hundred and sixty Democrats voted “nay”. As a result, language was not added to the major financial reform bill requiring that all financial transactions known as “swaps” be executed on an exchange that had registered with the Securities and Exchange Commission.