The Financial Regulation Reform Act of 2008 Seeks to Regulate Investment-Bank Holding Companies and Credit Default Swaps

US Senator Susan Collins (R-Maine) has introduced a new bill to regulate investment-bank holding companies, credit default swaps, and other financial instruments that state and federal regulators have yet to regulate. Collins says the bill, called the Financial Regulation Reform Act of 2008, seeks to restore public faith in the US financial system in the wake of current credit difficulties-problems that have led to plunging home prices, a decrease in consumer sales, an increase in foreclosure rates, and significant losses in retirement savings.

Collins says the new legislation will get rid of any gaps in the government’s oversight of the financial markets and develop more reforms of the financial regulatory system.

The Bill Proposes Three Main Reforms:

• Giving the Federal Reserve supervisory authority over investment-bank holding companies.
• Creating a national commission on financial regulation reform to evaluate, make recommendations, and implement changes to the current regulatory structure.
• Create transparency and oversight in the credit default swaps market by requiring that the Commodity Futures Trading Commission be notified about CDS contracts and mandating that parties make trades using a federally approved clearing house.

Credit Default Swaps
CDS are insurance-like contracts involving one party promising to cover losses on certain securities if a default occurs. Sold by hedge funds, banks, and other entities, they usually apply to mortgage securities, municipal bonds, and corporate debt.

Many CDS’s are represented as safe investments, when in fact, their risks often far outweigh their benefits. It was the unregulated credit default swaps market, a trillion-dollar-market, that reportedly led to the collapse of Lehman Brothers and AIG.

Sen Collins Introduces Legislation to Strengthen Financial Regulation and Oversight, Collins.Senate.gov, November 18, 2008
Credit Default Swaps: The Next Crisis?, Time, March 17, 2008
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