Madam Speaker, I, like my colleague in the Alliance, the member for Elk Island, object to this bill originating in the Senate. The Senate is unelected, undemocratic and unaccountable.
I remember the day when many Liberal Party members themselves would have objected to legislation originating in the Senate but now they are very supportive of this because half of them, including the member for Gatineau, want to become senators some day, which is why we do not hear very much on this from the Liberal Party.
Other than that, we do support the legislation before the House today. All members of the finance committee, as far as I know, are in support of the bill which was talked about a great deal before it was introduced in the other House.
Bill S-40 would amend the Payment Clearing and Settlement Act to permit securities and derivative clearing houses to realize the collateral of a member, for example, the deposit of a commodity, security or currency contract that the clearing house may enter into in the event of the bankruptcy or the insolvency of the member. Therefore if there is a bankruptcy or insolvency there is some collateral there for the clearing house. This would make it easier for the clearing houses to act more efficiently and provide more economic security for our economic system.
Canadian securities and derivatives clearing houses enable consumers and businesses to buy and sell securities and derivatives in a timely manner and at a reasonable cost. They do this by providing clearing and settlement services and acting as a central counter party to securities and derivatives trades.
The bill has been the result of extensive consultations with officials from the clearing houses in the country. There are three different clearing houses in Canada, as well la Bourse de Montréal, the Montreal stock exchange. I know the finance critics from all parties were consulted well ahead of this, before the bill was even in the drafting phase a number of months ago.
The bill has only one clause and that clause was expedited through the Senate in two weeks or less. The committee stage in the Senate lasted about one hour. There were no amendments by the Senate banking committee and subsequently Bill S-40 was reported with no amendments by the Standing Committee on Finance here in the House of Commons.
Although we in the NDP oppose the principle of unfettered speculation, and we are no friends of most of the derivative activity that takes place today, we can say that there are some good and bad derivatives. The good derivatives may help hedge corporate treasuries against the risk of security price changes and currency fluctuation risks. Bad derivatives are about gambling and what I call the casino capitalism that we see in many parts of the world. Speculation among derivatives allow a gambler, be it a corporate entity or an individual, to make a bet on the future price of an underlying asset by betting just a fraction of the cost of the asset.
The leverage comes about because the derivative instrument basically replicates borrowing and lending of the underlying asset without ever having to physically own the asset. We have seen many examples where individuals get into a great deal of trouble through leveraging and buying on margin. Companies do the same thing. When there is a downturn in the economy of a particular commodity or in a particular industrial sector then all kinds of problems can result as a consequence.
We support Bill S-40 because the legislation would reduce the systemic risk by containing the impact of bankruptcies on the securities and derivatives clearing system. It would also enhance the stability of the financial system by enabling securities and derivatives clearing houses to immediately realize assets pledged as collateral in the case of a default or bankruptcy by one of the members of a clearing house. This would guarantee a swift payment of collateral to clearing houses and would protect the stability of the system. Bill S-40 does it by taking a shortcut to override all other federal bankruptcy legislation. We have in the statute of this country many pages of bankruptcy regulations.
In addition, the mainstream are already in favour of Bill S-40. They say that the legislation would put Canada on a level playing field with the United States, with our partners in the G-8 and with our European partners, and would increase Canada's financial competitiveness and its ability to attract capital.
The main beneficiary of the legislation would be the Montreal stock exchange, the Bourse de Montréal, which also clears derivative transactions for the Winnipeg Commodity Exchange. The Montreal exchange, as the House knows, specializes in futures.
It is very important for the Montreal Stock Exchange. I discussed the bill with the president of the Montreal Stock Exchange on two or three occasions.
The explosion in derivatives has resulted in a shift to less transparent and less public, over the counter markets. In fact this lack of transparency has seen a real growth in the over the counter markets in the last seven or eight years.
In 1995 some $64 trillion U.S. were traded over the counter. In 1997, it went from $64 trillion to $360 trillion. In the latest figures from 2001, the marketing now of over the counter sale of stocks and other financial commodities has gone well over the $1 trillion mark.
This causes a major regulatory problem. Regulators increasingly have a hard time being aware of the data on the volume of derivative activity and the extent of the risk. I will give a couple of examples of what is meant by that.
The Enron fiasco, which is the largest bankruptcy as far as I know anywhere in the world, was partly due to the fact that derivative transactions were booked between private parties and not through public, transparent and fully regulated clearing systems, plus of course the failures of the auditors, which was Andersen Consulting. The bankruptcy was to the tune of some $110 billion, which has had ramifications throughout the system. Even in our country there is some concern about the bankruptcy of Enron in terms of some of our large corporations but also Andersen accounting.
Just the other day I asked the Governor of the Bank of Canada why the bank still retained Andersen's accounting services and he of course told me that he had confidence in Andersen's Canadian partner, its Canadian wing. Hopefully that is the case.
The other example is the massively leveraged hedge fund known as the long term capital management fund or LTCM. This fund had bet a substantial amount on the world's economy, on the future narrowing of interest spreads over U.S. treasuries. By mid-1998 the fund had about $4 billion in equity capital and borrowed funds of $120 billion, a hefty leverage of about 30 times.
Amazingly that leverage was compounded by another tenfold by the fund's off balance sheet derivatives' exposure amounting to more than another $1 trillion. In the end, a consortium of private banks, led by the federal reserve of New York, bailed out the fund and no public money in this case was actually involved.
The truth of the matter is that we do not really know the long term consequence of derivative wizardry and the real implications as to the economy. However financial deregulation has expanded the investment horizon of private investors but it has also created new systemic risks without really improving the access to affordable capital loans, which is one of the critical requirements for sustainable development that we certainly need in the world today.
The increasing poverty of so-called emerging countries is a case in point. The disciplining effects of the markets adjusting to speculative derivative bursts contribute to deflation, which hurts the weakest and most vulnerable countries and people in the world. Decades of development and efforts can be wiped out in a moment.
What is the key? I suggest the key is to obtain a regulatory environment and a system that would mandate a transparent, standardized, accountable and strict regulation of off-balance sheet items such as derivatives. All derivative products should fall under the same regulation and the same regulation, not just in Canada and the United States but indeed around the world. If we do not do something about that we will continue having problems. As we have large investment banks and wealthy investors speculating with other people's money we will see the continuing underdevelopment and poverty of many people in the world.
Financial speculation in the world is growing continually. The trade in currency is over $1.5 trillion in terms of U.S. dollars. About 90% of that trade in currency is purely for reasons of speculation. When we have that kind of speculation we end up with a system and a vision where poor people in poor countries are deprived of their fair share of resources and the wealth of the planet.
We have made a suggestion. I had a private member's motion in March 1999 which would have introduced a small tax on the speculation of currency, the so-called Tobin tax named after the late James Tobin who passed away a couple of months ago in the United States. Mr. Tobin had won a Nobel prize.
If we introduced a small tax, say 0.1% or 0.2% of each transaction, that tax would have two effects. First, it would slow down the speculation that is carried on mainly by investment bankers but also others in the world. It would also create a huge international development fund of several tens of billions of dollars each year, amounting very quickly to hundreds of billions of dollars. We could use that development fund as a modern day Marshall plan for the development of places, such as Africa and Afghanistan, third world countries, into a vision of helping them help themselves economically. This would be similar to what was done after the second world war in Europe when the Marshall plan was put into effect.
Those are the kinds of things that could be done if we had some regulation of the international financial market. We are suggesting that the bill before us today is a bill that is very short and not controversial. It brings a little bit more order and rationale to the clearing house system and to the payment and settlement system in our country. It affects the three clearing houses. It affects the Bourse de Montréal, the Montreal stock exchange. It is a bill we can all support in the House as a small step forward to a more rational economic system.