Monday, July 12, 2010

Lynch-Frank Colloquy Deals With Conflict of Interest on Ownership of Derivatives Clearing Houses

There was concern that, with derivatives trading required to be conducted through clearinghouses, large financial institutions would own and control the clearinghouses and effectively set rules for their own derivatives deals. In a colloquy with Rep. Stephen Lynch, House Financial Services Chair Barney Frank agreed that Sections 726 and 765 of the Act require the CFTC and SEC to adopt rules eliminating the conflicts of interest arising from the control of clearing and trading facilities by entities such as swap dealers, security-based swap dealers and major swap participants and major security-based swap participants. SEC and CFTC adoption of strong conflict of interest rules on control and governance of clearing and trading facilities is mandatory. According to Rep. Lynch, the rulemaking is necessary because 95 percent of the clearinghouses are owned by just five banks and Congress is relying on the clearinghouses to reduce systemic risk. Cong. Record, June 30, 2010, p. H5217.