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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

derivatives dealers. An enormous hedge fund, LTCM had amassed more than 
trillion in notional amount of OTC derivatives and  billion of securities on .
billion of capital without the knowledge of its major derivatives counterparties or

federal regulators. Greenspan testified to Congress that in the New York Fed’s
judgment, LTCM’s failure would potentially have had systemic effects: a default by
LTCM “would not only have a significant distorting impact on market prices but
also in the process could produce large losses, or worse, for a number of creditors
and counterparties, and for other market participants who were not directly in-
volved with LTCM.” 
Nonetheless, just weeks later, in October , Congress passed the requested
moratorium.
Greenspan continued to champion derivatives and advocate deregulation of the
OTC market and the exchange-traded market. “By far the most significant event in
finance during the past decade has been the extraordinary development and expan-
sion of financial derivatives,” Greenspan said at a Futures Industry Association con-
ference in March . “The fact that the OTC markets function quite effectively
without the benefits of [CFTC regulation] provides a strong argument for develop-
ment of a less burdensome regime for exchange-traded financial derivatives.” 
The following year—after Born’s resignation—the President’s Working Group on
Financial Markets, a committee of the heads of the Treasury, Federal Reserve, SEC, and
Commodity Futures Trading Commission charged with tracking the financial system
and chaired by then Treasury Secretary Larry Summers, essentially adopted
Greenspan’s view. The group issued a report urging Congress to deregulate OTC deriv-
atives broadly and to reduce CFTC regulation of exchange-traded derivatives as well. 
In December , in response, Congress passed and President Clinton signed
the Commodity Futures Modernization Act of  (CFMA), which in essence
deregulated the OTC derivatives market and eliminated oversight by both the CFTC
and the SEC. The law also preempted application of state laws on gaming and on
bucket shops (illegal brokerage operations) that otherwise could have made OTC de-
rivatives transactions illegal. The SEC did retain antifraud authority over securities-
based OTC derivatives such as stock options. In addition, the regulatory powers of
the CFTC relating to exchange-traded derivatives were weakened but not eliminated.
The CFMA effectively shielded OTC derivatives from virtually all regulation or
oversight. Subsequently, other laws enabled the expansion of the market. For exam-
ple, under a  amendment to the bankruptcy laws, derivatives counterparties
were given the advantage over other creditors of being able to immediately terminate
their contracts and seize collateral at the time of bankruptcy.
The OTC derivatives market boomed. At year-end , when the CFMA was
passed, the notional amount of OTC derivatives outstanding globally was . tril-

lion, and the gross market value was . trillion. In the seven and a half years from
then until June , when the market peaked, outstanding OTC derivatives in-
creased more than sevenfold to a notional amount of . trillion; their gross mar-
ket value was . trillion. 
Greenspan testified to the FCIC that credit default swaps—a small part of the