In his 2002 annual report on Berkshire Hathaway, Warren Buffet characterized derivatives as "financial weapons of mass destruction" which carry "dangers that, while now latent, are potentially lethal."
Much has changed since the "Oracle of Omaha" issued his indictment, and some complex derivatives -- like credit default swaps – are under fire for their contribution to the collapse of financial and credit markets.
Now, Congressional leaders are considering a series of reforms that could represent the most sweeping changes to the financial regulation system since the 1930s. In an attempt to ensure greater transparency in futures markets, House Agriculture Committee Chairman Collin Peterson is floating a bill which would tighten restrictions on derivatives trading.
Known as the "Derivatives Markets Transparency and Accountability Act of 2009", the measure is an attempt to control speculators who are being blamed for high prices in commodity and energy futures markets.
Witnesses ran the gamut of academics, to traders, to farm advocacy group representatives. They commented on various points of the legislation which include stricter reporting requirements for market data, increased access to trading records, and granting the Commodity Futures Trading Commission, or CFTC, authority to impose trading limits.
Tom Buis (BUY-us), president of the National Farmers Union, wants tighter control over speculators and believes the measure should be sent to the House floor for swift approval.
Tom Buis, National Farmers Union: "Rural America lost lots of money off of this effort. And, I think, as Mr. Cota said, it's because no one knows what the positions were, how extensive the money was, and who held those positions. So how can anyone convience me that you didn't have excessive speculation if you are not even accounting for all the activity in the market place, because of the exemptions, the swaps, foreign market exchanges, etcetera?"
Terrence Duffy, executive chairman of the Chicago Mercantile Exchange Group which owns the Chicago Board of Trade, asked the committee to avoid creating barriers to a free market.
Terrence Duffy, Chicago Mercantile Exchange Group: " No, we don't condone excessive speculation, er, uh, rampant speculation, as you put it sir. We do believe there is a buyer for every seller, a seller for every buyer. The more liquidity there is the better the price the person is trying to hedge their risk will get for their product."
The measure would ban the sale of what are known as naked credit-default swaps -- a market valued at more than $29 trillion. These financial instruments are a form of insurance in that the holder makes a profit if the company being covered goes under. And many insurance industry regulators believe up to 80 percent of credit-default swap sales are conducted by investors who do not own the underlying debt. On top of the lack of ownership, supporters of the bill are concerned that trading is generally hidden from CFTC regulators.