Advocate Summary

Issue:  Derivatives
Advocate:  The Bond Market Association – Mike Williams
Date of Interview: 7/9/02

Basic Background
Primarily the International Swaps and Derivatives Association [ISDA] has a lead on the issue itself, the reason the Bond Market Association got involved is because our main focus is on fixed income and derivates and swap contracts usually fall under the rubric of fixed income. So we are involved in the process and we got involved early because the first amendment, the first iteration of it, actually covered more than just energy and metal and the electronic trading of those entities, it went broad into all over the counter derivative transactions so we got involved in that respect. It was scaled back quite considerable. Senator Feinstein again, her true intention was to cover energy, metals were included, very few people understand why metals were included, politically we can only surmise that it makes sense to hold a coalition together, because there are some members who care about that, particularly folks from the Midwest and who have trade entities in their states and districts. 

[So it wasn’t in anticipation of regulation, but because the financials were included early on?]
Actually it was pretty close for a while, it started that the height of Enron, all of these things were going on at that particular time and all the news stories that were being printed sort of would lead people to believe -they weren’t the most accurate disseminators of information, because they would mention derivatives but they would not put them in the context of what Enron did with derivates, thereby leading people to make the association that what happened with Enron had something to do with derivatives, same with special purpose entities, they would mention special purpose entities and sort of off-balance-sheet transactions and lead people to believe that the things that Enron did to hide debt were inextricably linked to special purpose entities, which they were not, so again, you did not really have that in-depth reporting that would have been helpful to clear up some of these misconceptions. So that was a real concern, that the bill could pass, of course the larger bill would have radically changed the CFMA provisions, that was a major concern to us, but once it was modified it was still a concern to us in the sense that, while it wouldn’t have ratified the CFMA wholesale, it would have done, we think, major damage to significant portions of it that control the electronic trading and metal concerns. 

Prior Activity on the Issue 
The CFMA [Commodities Futures Modernization Act] was a pretty spirited debate in terms of how you should regulate this particular entity, and whether or not in fact OTC derivatives should in fact be regulated by FERC or the CFTC or the SEC or some other entity. And a decision was made not to regulate them by them, because essentially what it comes down to, in its barest essence is a contract between two institutional entities, it’s no sort of individual investors or mom and pops, you can’t walk into a bank or financial institution and say I want to purchase a swap contract or I want to purchase a derivative. So you have financially stable, we hope and for the most part it’s proven to be that way, entities that are engaging in these contracts and thereby are able to one, figure out the risks involved and two, take on those risks assuming that they have enough capital to cover it. And part of the contract, it is a standard contract that ISDA maintains and the [Bond Market] Association as well, that covers all of these transactions, therefore it is pretty standardized, in that they know what they’re getting and the counterparties know what they are getting into and what the terms of the deal are going to be and if there is a problem they can refer back to the standard contract. So we made the argument during CFMA that there is no real need to regulate these particular instruments by any entities, because in fact what you would do is have regulations imposed on them that would prove adverse to their efficient operation and they wouldn’t be used, they’d be relying on some other financial instrument that may not be as efficient. Again, that was part and parcel of our first claim which was, it was important to look at this in a holistic context not just in the context of an energy bill, we had this debate during CFMA and that was only two years ago, so why not go back and take a look at it, take a real look at it, and figure out if any mistakes were made during the CFMA debate, we don’t think there were, but you can’t just do it kind of piecemeal because if you do it piecemeal, it’s gong to have unintended consequences associated with that action. 

Advocacy Activities Undertaken
What we’ve done is essentially conduct outreach to members, staff members, and to senators themselves on the issue. Just pointing out that the issue is a complicated one, I mean it’s hard for people to understand what derivatives are and what swap contracts are and what benefits they have generally because it’s a hard thing to really dig down into and the deeper you go the more complicated it gets and we are trying to break it down into digestible kernels of information, just to demonstrate to folks that these things do not only effect the members involved but they sort of transcend the individual firms that are involved in these transactions and they have a larger impact on the economy because they in fact help hedge risk which is associated with a lot of the financial transactions that go on outside of derivatives. Again, it’s a hard concept to understand but our point was because of that you shouldn’t deal with an issue as complicated and as far reaching as over the counter trading of derivatives and swaps in the context of an amendment on a larger energy bill, without having a full hearing on it and actually looking into the specifics and making sure that there aren’t unintended consequences associated with the action you might take that would cause the market to react negatively and thereby further erode consumer confidence. 	It was a tough sell obviously because again, people didn’t understand what the underlining entities were and how they operated, and the very few people who did have an understanding of those issues, they didn’t fully get engaged because the major issue was the energy bill itself, and there were so many conflicting interests that were associated with that bill and its debate on the senate floor over the course of a month, that it was hard for anyone to focus specifically on one issue, and actually go to the floor of the Senate and explain what happened. And Senator (Phil) Gramm (R-TA) actually did that and he made a good attempt of doing it and we’re hoping to get a number of other members, Jon Corzine (D-NJ) from New Jersey for example to go to the floor, and he was actually on the side of Senator Feinstein, but just to actually go to the floor and have a conversation about what derivatives are and what role they play and just sort of help sway people from the sort of demonization of these things, and just sort of lumping them into the other bad things that Enron did. And another point we raised was you know, Enron may have used derivatives in their trading transaction but there’s no causal link between what happened at the conference and some of the things they did and derivatives. So again, why demonize a legitimate financial instrument just because a particular company that went under and had some pretty severe trouble, utilized them. It is sort of likened to, because Enron used special purpose entities,  that doesn’t mean that special purpose entities in and of themselves are bad, that’s another financial instrument that has legitimate purposes that transcends energy and anything else that Enron did, you have those types of vehicles that are important to asset-backed securitizations and help people to get lower rates on their credit cards, lower rates on their moorages, boat loans, auto loans, whatever it is that’s securitized, these entities are helpful. So let’s not demonize them just because Enron happened to use them and there are a lot of companies that use them and use them in a legitimate way. That was our major thrust, one, just because Enron did it that doesn’t make them bad, and two, let’s do a full investigation to figure out whether or not these things had any role at all in the Enron debacle. And if in fact there was a role and Enron did abuse them and they are susceptible to abuse by others then let’s have a discussion on how to make those changes without effecting the market. 

We didn’t do any media, it was too hard of an issue and too complicated of an issue to actually break down into sound bites. I think if we had done anything like that it probably would have made the situation worse because you would have gotten a story printed in one of the major papers, that wouldn’t give all the necessary details, for a number of reasons, one it’s a big issue, it takes a lot of explanation and therefore it takes up a lot of space and a newspaper wouldn’t be able to capture. What we did is we got a number of our member companies, ISDA’s member companies and the energy and metal concerns to sign on to numerous letters to members. We actually participated just recently in the past month or so and did a staff briefing for about 70 or 75 or so senate staff. Just background on what swaps and derivatives are, and giving examples of how they are beneficial to particular companies and how they for example in energy companies, not energy trading per se like Enron, but an energy company that provides power, and how it is that these folks engage in derivative transactions to make energy costs affordable. Try to get it again to that digestible kernel of information so people can start to understand and look at them in a different light. And the staff visits and the member visits were probably the largest part of our lobbying campaign. 

On this one, normally we take research in and we try to show why, SPEs for example, we put together a paper, a comprehensive paper on what SPEs are, how they work, and what the benefits are and what the market looks like that SPEs serve and the potential impact – that’s a little easier to understand than a derivatives transaction, to put together a derivatives transaction you have a copy of the master agreement there, that will explain that but that will probably take you a few hours and it was hard to in there with very specific things outside of talking points for example, here’s why we feel that this Feinstein amendment is not the appropriate thing to do at this time. And again, trying to break it down into digestible kernels what I just explained to you that was wrong with the bill. And that was due to the time that we had to lobby the issue as well as the actual issue itself, so for the same reason we couldn’t do it with a newspaper we couldn’t do it with the staff either, an education process was necessary because when people heard derivatives the first thing they thought about was Enron, because prior to that, if you weren’t on the Senate Banking Committee or you weren’t on the Senate Ag Committee you probably never heard of derivatives before, and those people probably only ever heard of derivatives in the context of CFMA, and that was two years ago – so there were very few people that were versed in it and when I say verse I mean you know, just heard of it before.

Future Advocacy Activities Planned
They’re going to do their first hearing on the issue tomorrow in the Senate Ag committee and ISDA is going to testify.

Key Congressional Contact(s)/Champions
Sure there were Senators that agreed with us, that you can’t just ram something through, just because of political expedience and because you have the momentum going your way. Mike Crapo (R) from Idaho was one of those members, (Zell) Miller (D-GA) on the Democratic side was one of those members and they were very helpful throughout the process and as you can see there were a number of Democratic members that voted against the amendment when it came up. 

And Senator (Phil) Gramm (R-TA) actually did that and he made a good attempt of doing it…

Targets of Direct Lobbying
and we’re hoping to get a number of other members, Jon Corzine (D-NJ) from New Jersey for example to go to the floor, and he was actually on the side of Senator Feinstein, but just to actually go to the floor and have a conversation about what derivatives are…

[see discussion below concerning the lack of time to target individuals or arguments.]

Targets of Grassroots Lobbying
None mentioned.

Coalition Partners: Names/Participants
We were working with ISDA and certainly with a number of our member companies, as well as with energy and metals and everyone had pretty much the same issues, the metal concerns had a more specific issue in this because it would actually impact them directly. Our issue was more of a larger market issue and not sort of disrupting the market which would have adverse effects that would trickle down to other areas, even though financial derivatives were not covered in the end. 

[I know some energy companies supported Feinstein, who were opposed?]
Just about everybody else. We only dealt with the companies themselves, Duke comes to mind, they were active and Merit that was the other that was pretty heavily involved as well. 

And we had Morgan Stanley, JP Morgan Chase, Ramon (sp? ) Brothers, Beer Sterns (sp?) Goldman Sachs, most of the major financial houses were involved. 

Other Participants in the Issue Debate
[Opposition]
Senator Dianne Feinstein (D-CA)

Ubiquitous Argument(s) and Evidence
Again, it’s a hard concept to understand but our point was because of that you shouldn’t deal with an issue as complicated and as far reaching as over the counter trading of derivatives and swaps in the context of an amendment on a larger energy bill, without having a full hearing on it and actually looking into the specifics and making sure that there aren’t unintended consequences associated with the action you might take that would cause the market to react negatively and thereby further erode consumer confidence. It was a tough sell obviously because again, people didn’t understand what the underlining entities were and how they operated, and the very few people who did have an understanding of those issues, they didn’t fully get engaged because the major issue was the energy bill itself, and there were so many conflicting interests that were associated with that bill and its debate on the senate floor over the course of a month, that it was hard for anyone to focus specifically on one issue, and actually go to the floor of the Senate and explain what happened. And Senator (Phil) Gramm (R-TA) actually did that and he made a good attempt of doing it and we’re hoping to get a number of other members, Jon Corzine (D-NJ) from New Jersey for example to go to the floor, and he was actually on the side of Senator Feinstein, but just to actually go to the floor and have a conversation about what derivatives are and what role they play and just sort of help sway people from the sort of demonization of these things, and just sort of lumping them into the other bad things that Enron did. And another point we raised was you know, Enron may have used derivatives in their trading transaction but there’s no causal link between what happened at the conference and some of the things they did and derivatives. So again, why demonize a legitimate financial instrument just because a particular company, that went under and had some pretty severe trouble, utilized them. It is sort of likened to, because Enron used special purpose entities,  that doesn’t mean that special purpose entities in and of themselves are bad, that’s another financial instrument that has legitimate purposes that transcends energy and anything else that Enron did, you have those types of vehicles that are important to asset-backed securitizations and help people to get lower rates on their credit cards, lower rates on their moorages, boat loans, auto loans, whatever it is that’s securitized, these entities are helpful. So let’s not demonize them just because Enron happened to use them and there are a lot of companies that use them and use them in a legitimate way. That was our major thrust, one, just because Enron did it that doesn’t make them bad, and two, let’s do a full investigation to figure out whether or not these things had any role at all in the Enron debacle. And if in fact there was a role and Enron did abuse them and they are susceptible to abuse by others then let’s have a discussion on how to make those changes without affecting the market.

Secondary Argument(s) and Evidence
And we all talked about the impact it would have on the industries but in the context of unintended consequences. 

We made the counter argument that it is not in any of our member’s interests to corner the market if you will, I mean we’re talking about billions of dollars, and you have an agreement with another counter party that you are responsible to uphold, so you’re not going to get yourself into a situation where you run the risk of massive exposure. Again, if you’re Enron and you’re doing things that just don’t seem right, I mean there is no explanation for that, but most companies operate more reasonably than that.

Targeted Arguments, Targets, and Evidence
It was pretty much just trying to convey what these instruments are and why it is important for them to be considered in a larger context rather than piecemeal on a piece of legislation that may or may not be in the right place to be considered. There really wasn’t enough time to target people, say folks that had metal concerns or folks that had energy concerns, given the context of Enron, people were just kind of concerned generally so had to just sort of do a shot gun approach, rather than very strategically placed strikes. So I guess the timing of it didn’t lend itself to that and the issue itself didn’t lend itself to targeting specific members on specific issues. 

Nature of the Opposition
Feinstein and her supporters.

Ubiquitous Argument(s) and Evidence Articulated by the Opposition 
Her fundamental argument was that you know you can’t have these go unregulated, because if you have them go unregulated you know you don’t have any anti-fraud provisions, you don’t have any anti-manipulation provisions and you leave them open for companies do just that, to manipulate the market and somehow commit fraud in doing that. So it’s sort of a philosophical argument; one, she never actually showed that they did any of these transactions, even when these Enron memos came out there was never any proof that derivatives were in fact used to facilitate those market manipulations and tactics that they undertook, so again it’s a philosophical debate, yeah it is possible but again you have to look at the market operation and see if those things actually happened. We made the counter argument that it is not in any of our member’s interests to corner the market if you will, I mean we’re talking about billions of dollars, and you have an agreement with another counter party that you are responsible to uphold, so you’re not going to get yourself into a situation where you run the risk of massive exposure. Again, if you’re Enron and you’re doing things that just don’t seem right, I mean there is no explanation for that, but most companies operate more reasonably than that. 

Secondary Argument(s) and Evidence Articulated by the Opposition
None mentioned. 

Targeted Argument(s) and Evidence Articulated by the Opposition (and Targets)
None mentioned. 

Described as a Partisan Issue
No.

Venue(s) of Activity
Senate Agriculture Committee

Action Pending or Taken by Relevant Decision Makers
The first hearings were being held in the Senate Agriculture committee the day after the interview.

Policy Objective(s) and Support for/Opposition to the Status Quo
[Working to block Feinstein’s amendment to bring over the counter derivatives under regulation, feel if they are going to be regulated that it should not be done piecemeal through an amendment.]

Advocate’s Experience: Tenure in Current Job/Previous Experience
I’ve been here for three years. I came here from the White House, I was there for four and a half years and lobbied for them and prior to that I was in New York state and lobbied there. 

Reliance on Research: In-House/External (Code for Organizational Advocates Only)
On this one, normally we take research in and we try to show why, SPEs for example, we put together a paper, a comprehensive paper on what SPEs are, how they work, and what the benefits are and what the market looks like that SPEs serve and the potential impact – that’s a little easier to understand than a derivatives transaction, to put together a derivatives transaction you have a copy of the master agreement there, that will explain that but that will probably take you a few hours and it was hard to in there with very specific things outside of talking points for example, here’s why we feel that this Feinstein amendment is not the appropriate thing to do at this time. And again, trying to break it down into digestible kernels what I just explained to you that was wrong with the bill. And that was due to the time that we had to lobby the issue as well as the actual issue itself, so for the same reason we couldn’t do it with a newspaper we couldn’t do it with the staff either, an education process was necessary because when people heard derivatives the first thing they thought about was Enron, because prior to that, if you weren’t on the Senate Banking Committee or you weren’t on the Senate Ag Committee you probably never heard of derivatives before, and those people probably only ever heard of derivatives in the context of CFMA, and that was two years ago – so there were very few people that were versed in it and when I say verse I mean you know, just heard of it before.

But, so we do everything in-house. 

Number of Individuals Involved in Advocacy (Code for Organizational Advocates Only)
Three

Units in Organization Involved in Public Affairs/Policy (Code for Organizational Advocates Only)
We have about 25 people here, but it’s not a government affairs office as such, we have an office in New York, DC and London, and the DC office has different components, we have three lobbyists here and we also have a policy and research staff that sort of works hand and glove with the lobbing operation but they also provide other functions as well, and they put out research works that are helpful to our members. So it is a government affairs operation in the sense that it is in DC and our primary focus is advocacy but there are other issues that we work on as well, so I’d say here in DC we have about 25 people. 

Advocate’s Outstanding Skills/Assets (Code for Organizational Advocates Only)
None mentioned.

Type of Membership: None, Institutions, Individuals, Both (Code for Organizational Advocates Only)
Institutions - Corporations

Membership Size (Code for Organizational Advocates Only)

Organizational Age (Code for Organizational Advocates Only)

Miscellaneous