WASHINGTON, D.C. - Select Revenue Measures Chairman Richard Neal (D-MA), issued the following opening statement at a hearing examining whether there is a need for more uniform tax treatment for various derivative structures:
“I call this hearing to order. Please take your seats.
“I want to welcome everyone to this hearing on the taxation of derivatives by the Select Revenue Measures Subcommittee. This topic is not for the faint of heart. Just explaining the different types of derivatives can fill volumes. Plus, the market is constantly evolving and growing. The Bank for International Settlements recently estimated the market for derivatives has exceeded $500 trillion in notional amounts just for the first half of last year. And for those taking notes, 500 trillion is half a quadrillion.
“Complexity is the name of the game in the derivatives market. But I believe it is important for Congress to understand how this market operates and for this Committee to understand how these products are taxed. It would be easy for us to assume the regulators are taking care of this. And it would be easy for us to dismiss these products as ones only sophisticated investors use minimizing any impact to our economy. It has been said that the road to success is dotted with many tempting parking places. Today, we plan to keep on driving.
“No doubt, derivatives play an important role for businesses and investors to minimize or control risk. But they are also an attractive tool for speculators. Warren Buffet has referred to derivatives as ‘financial weapons of mass destruction.’
“If we think back to the collapse of Enron, or even farther back to Long Term Capital Management, we understand how the abuse of derivatives can have a negative impact not only on the parties to the contract, but also on the market and the economy. Just last Friday, the market took a hit when one insurer devalued its holdings by $5 billion in one derivative - the credit default swap.
“As we will hear in testimony today, investors and regulators deserve some certainty and clarity with respect to derivatives. I believe we set up inherent conflicts when derivatives enjoy a better tax treatment than the underlying asset.
“The first panel today will discuss the area of derivatives more broadly, while the second panel will focus on prepaid forward contracts. I believe we have assembled a diverse group of witnesses today to help us navigate through this complex area. There is an African proverb that says the smooth seas do not make skillful sailors. I expect the testimony today will show some divergent view points, but hopefully, at the end, Mr. English and I will be more skillful sailors."
