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Good morning. I thank Professor Merit Janow for that kind introduction and the Council on Foreign Relations for inviting me to speak. I also want to wish you a happy new year. I hope that the new year will bring all that you wish it to bring. For me, that is financial regulatory reform. And of course that my daughter get into the college of her choice.
The 2008 financial crisis left us with many lessons and many challenges to tackle. From addressing institutions that are too big to fail to reforming mortgage underwriting and sales practices, it is essential that the Federal Government take significant steps to prevent the next crisis. This morning, I will focus on the need for comprehensive reform of over-the-counter (OTC) derivative markets.
In the year since the crisis, some have asked: why is it important to bring greater regulation to derivatives now? The financial crisis certainly highlighted the need for regulatory reform of the derivatives marketplace. Had the crisis not occurred, however, the evolution of these markets would still warrant broad reform.
Derivatives are contracts used by corporations, municipalities, nonprofit organizations and others to protect themselves from the risk of a future change in markets. Every consumer is touched by corporations that use derivatives. Some of these corporations hedge interest rate risks; some purchase products from a supplier who hedged a currency rate. If you flew to visit your family over the holidays, the airline most likely hedged its risk that the price of jet fuel would increase. Local fuel companies use derivatives to lock in the price of winter heating oil for their customers.
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