CFTC leaders tell Vatican derivatives reduce food price volatility
July 25, 2018
In response to Vatican criticism of derivatives, specifically credit default swaps (CDS), Commodity Future Trading Commission Chairman Christopher Giancarlo and CFTC Chief Economist Bruce Tuckman have written a letter in defense of derivatives.
The letter begins by noting that Giancarlo is a practicing Catholic and that he and Tuckman are "finance professionals striving to lead moral lives."
Derivatives, they write, "serve the needs of society to help moderate price, supply and other commercial risks to free up capital for economic growth, job creation and prosperity" and "allow the risks of variable production costs, such as the price of raw materials, energy, foreign currency and interest rates, to be transferred from those who cannot afford them to those who can."
The letter addresses the impact of derivatives on vulnerable populations, offering examples of how well-functioning financial and derivatives markets play a crucial role in feeding the world's growing population, concluding, "(i)n many ways, the greatest beneficiaries of global derivatives activities may well be the world's hungriest and most vulnerable."
"These are the people that Pope Francis has so powerfully advocated for by calling our attention to the 'peripheries' of the world. They would certainly suffer the most from the extreme price volatility in basic food and energy commodities that would result if derivatives trading were to suddenly cease."
Giancarlo and Tuckman say governments can benefit from CDS, but they acknowledge that "national governments do not always conduct their financial affairs in the best interests of their people or with the highest degree of fiscal competence or integrity, and the prices of government bonds, or of CDS on sovereign nations, are an important check on poor fiscal management."
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They also said they agree with the Vatican document "in being skeptical of overly complex derivative products, like CDS tranches on mortgage-backed securities, which traded in great volume in the run-up to the 2007-2009 financial crisis.
"And we also agree that buyers of CDS protection, who stand to gain from defaults, must not be allowed to conspire to cause those same defaults or make them more likely. Such activity has recently drawn our regulatory scrutiny and censure."