Henry Hu Testifies for SEC on Derivatives Regulation Before the U.S. House Committee on Financial Services

Professor Henry T. C. Hu testified on behalf of the U.S. Securities and Exchange Commission before the U.S. House Committee on Financial Services at its Oct. 7 hearing, "Reform of the Over-the-Counter (OTC) Derivatives Market."

Hu, who holds the Allan Shivers Chair in the Law of Banking and Finance at The University of Texas School of Law, is the first director of the SEC's newly created Division of Risk, Strategy, and Financial Innovation. Gary Gensler, chairman of the Commodity Futures Trading Commission, was the other member of the panel.

The committee is headed by Chair Congressman Barney Frank (D-Mass.) and ranking member Congressman Spencer Bachus (R-Ala.). The OTC derivatives market, involving about $450 trillion in outstanding notional amount terms as of June 2009, is largely excluded from the current regulatory framework.

SEC Chairman Mary L. Schapiro announced last Sept. 16 Hu's appointment as the director of the Division of Risk, Strategy, and Financial Innovation. With the establishment of the new division, the SEC now has five divisions, including the Division of Corporation Finance, the Division of Enforcement, the Division of Investment Management and the Division of Trading and Markets. This is the first new division at the SEC since 1972.

An expert on law and modern finance, Hu has written on asset allocation, the regulation of banks, derivatives, hedge funds and mutual funds, corporate governance, the "decoupling" of debt and equity rights from economic interests, disclosure, financial rationality and sophistication, the global "competitiveness" of U.S. derivatives markets, model risk, risk management, stocks and "time diversification," swaps and the modern process of financial innovation, and Warren Buffett.

He recently was the lead author on a series of seminal articles on the debt and equity "decoupling," its effects on corporate and debt governance and world systemic risk, and possible disclosure and substantive responses. In a 2006 article he coined the terms "empty voting" and "hidden (morphable) ownership." In 2007, he coined the term "empty creditor." This decoupling scholarship has attracted national media attention, including a lead front-page story in the Wall Street Journal and stories in the Economist, the Financial Times and the New York Times.

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Written testimony (PDF, download Adobe Reader) and video (Windows Media Player) of the House hearing is online.