State treasurers support U.S. swaps reform

WASHINGTON, May 17 (BestGrowthStock) – State treasurers across the
United States favor parts of a financial regulation reform plan
that would increase oversight of swap agreements, including
creating more price transparency and establishing a central
exchange, they said in a letter released on Monday.

The largely unregulated swap market has become a heated
point in Senate debates on the bill to overhaul financial
regulation, which is expected to pass this week. The
legislation includes a proposal for banks to separate their
swap-trading desks from other business and creating trading
platforms.

Although the plan contains no provision to limit states’
use of the derivatives, the state treasurers are seeking
assurances the legislation’s final version will allow them to
continue using swaps. State treasurers oversee large amounts of
the debt in the $2.8 trillion municipal bond market.

“As primary issuers of municipal securities, state
treasurers are also very much interested in provisions of the
bill that would have an impact on their ability to manage their
securities and protect taxpayer interests by being able to
enter into various swap agreements,” said New Mexico Treasurer
James Lewis in a letter to Senator Chris Dodd, the chairman of
the Senate Banking Committee.

Swaps have recently fallen under the regulatory microscope,
with Pennsylvania’s auditor general urging municipalities in
his state not to enter into the agreements, saying they are
“lining pockets on Wall Street.” Many of the state’s school
districts were burned by swaps that they did not understand.

The reform bill that Dodd is shepherding through the Senate
would force how swaps are arranged into the light.

The letter to Dodd, written on behalf of the National
Association of State Treasurers that Lewis chairs, said
independent advisers should assist in negotiating the terms and
conditions of interest rates swaps.

They should have “a fiduciary responsibility and should be
registered and regulated and required to meet minimum
professional standards,” the letter said.

In interest rate swaps, which issuers use to lower net
interest costs on debt, an issuer pays a counterparty a fixed
amount of interest and the counterparty, such as a bank,
returns by paying a variable rate of interest.

Typically, if an issuer cannot make a payment, the
counterparty is free to end the agreement and charge a steep
termination fee. Issuers can also end up paying punitively high
variable rates to banks.

The treasurers added that counterparties and brokers must
also take on the responsibility of determining bond issuers’
understanding of swaps, but they should not be considered
fiduciaries.

Credit default swaps, a type of insurance that can be
traded as a security, should be standardized, the letter said.
There should be an exchange for the swaps, collateral
requirements, and public information on how many swaps have
been traded and their prices, it continued.

“Credit default swaps should be regulated at the federal
level to reduce systemic risk,” the letter said.

Stock Market Money

(Reporting by Lisa Lambert; Editing by Leslie Adler)

State treasurers support U.S. swaps reform