Hearing on "Maintaining Leadership in the Financial Marketplace of the Future"


Statement of Shawn A. Dorsch
President and Chief Operating Officer
Derivatives Net, Inc.

9:00 a.m., Monday, May 8, 2000
3rd Floor Conference Center - Federal Reserve Bank of Chicago
230 South LaSalle Street, Chicago, Illinois


On behalf of Derivatives Net, Inc. and its parent company, DNI Holdings(DNI), I am pleased to have this opportunity to present testimony as part of the Committee's ongoing hearings on the Financial Marketplace of the Future. I would like to observe, at the outset, that at DNI, we subscribe to the famous quote most often ascribed to George Allen, the former coach of the Washington Redskins, that "the future is now."

DNI was co-founded in 1996 by Raymond May, who, like myself, is a former swaps trader at J.P. Morgan & Co. The company is headquartered in Charlotte, North Carolina, with offices in New York, and, in the very near future, London and Tokyo. DNI is the developer of "Blackbird," not the airplane, but rather a namesake proprietary communications and information system over which the world's largest financial institutions may negotiate and agree to certain types of "swaps" transactions on a fully electronic basis. We named the system after the aircraft because it strives to be sleek, fast and reliable. We were also mindful of the fact that this particular aircraft project was built on schedule and delivered under budget.

It took us three years of dedicated effort and no small amount of venture capital (our own included) to take the Blackbird system from the concept stage, through intensive testing, and ultimately to successful deployment last summer. At the present time, there are over 30 commercial and investment banks utilizing Blackbird to effectuate swaps agreements totaling hundreds of million of dollars per day. We are the first and, at this point, the only operational interdealer electronic system for interest rate and currency swaps. The Blackbird system, I might add, is protected by 152 pending patents.

By way of further background, it should also be noted that Blackbird was developed with careful attention to the existing statutory and regulatory structure governing swaps. The Blackbird system is modeled after and, in fact, is nothing more than the electronic analog of the telephone "voice brokers" who now serve as facilitators for swaps dealers and, as such, are not subject to regulation by the Commodity Futures Exchange Commission (CFTC). Blackbird fulfills the same function, but, we would submit, with far greater efficiency and benefit to the financial system than voice broker methodology.

It has always been DNI's view that Blackbird would and should operate under the same regulatory structure as our telephonic counterparts. After all, the fundamental goal of DNI is simply to provide its financial institution customers with a computerized system that will bring greater speed, precision, safety and security, and lower costs to the very same interest rate and currency risk management business activities that are now taking place every day at numerous U.S. financial institutions.

In spite of this carefully executed business plan, DNI initially found itself subject to searching review by the CFTC and to pointed criticism from some of the traditional exchanges subject to the CFTC's jurisdiction. I am pleased to report, however, that by letter dated February 8, 2000, the Chairman of the CFTC, William Rainer, communicated to the Congress the results of the Commission's review of Blackbird's business activities with the conclusion that no "affirmative action" was warranted. Previously, the November 1999 Report of The President's Working Group on Financial Markets concerning "Over-the-Counter Derivatives Markets and the Commodity Exchange Act" likewise supported DNI's position that electronic systems involving eligible swaps participants trading for their own account should be excluded from the Commodity Exchange Act (CEA).

Finally, we take considerable "home state" pride in noting that Senator Helms and the entire North Carolina delegation to the U.S. House of Representatives have gone on record, in letters sent last year to Chairman Rainer, that companies such as DNI should not be subject to CFTC jurisdiction. If Mr. Rainer and the President's Working Group had taken a different position, we might now be speaking of DNI in the past tense as a U.S. entity since we almost certainly would have been forced to take our cutting edge technology, along with potentially hundreds of jobs, to overseas locations.

We are aware that the CEA is now up for legislative review and, in previous testimony before the other relevant committees of the Congress, we have supported the long overdue goal of statutory modernization. Indeed, we believe that it was the outmoded structure of the CEA that contributed, in large part, to the initial confusion about Blackbird's regulatory status. We continue to support both updating the CEA and providing appropriate regulatory relief for all swaps participants, including the traditional exchanges.

However, as the only electronic system of its type now actually serving swaps dealers, Blackbird is also concerned about the potential discriminatory effect that any legislative proposal to change the regulatory treatment of electronic systems for negotiating swaps transactions could have on its current operations. Most participants in the debate related to the upcoming legislative deadline for reauthorizing and possibly amending the CEA are rightly focused on the future structure of the CEA and the financial markets falling within its jurisdiction. As I have stated, however, for DNI, its customers, its employees and its investors, this is not a debate about the future.

We do not wish to sound unduly negative about ongoing legislative efforts. We appreciate that many are working in the legislative and regulatory process in a principled way to advance a system of law and regulation applicable to derivatives that would be based on sound public policy concerns not protectionism. We are especially grateful to Chairman Rainer and all who have been involved in the preparation of The President's Working Group for their enlightened views and to the congressional leaders who are working to convert the Administration's recommendation into meaningful legislative reforms. In light of the pace of technological and marketplace changes, which are moving in tandem, this will be no easy task

We likewise appreciate that the technology behind the Blackbird system is disruptive to the status quo. This phenomenon, however, is occurring across a broad range of the economy as the Internet and related electronic advances replace familiar business methodology that has well served the American public. Be that as it may, the introduction of new means of doing business would not justify any legislative effort to change the rules adversely and at midstream for the Blackbird system which has been widely hailed as a technological breakthrough that promotes competition, reduces operational risks, lowers costs, and, in the independent view of the federal supervisory authorities, enhances the safety and soundness of the global financial system.

Mr. Chairman, as we move forward with the further implementation of our business plan and the deployment of Blackbird on a broader scale, we take great comfort in the guiding principles which you have enunciated at the prior Committee hearings on this particular topic, namely that technology should be allowed to take the lead and that the Congress should adopt the "economic equivalent of the Hippocratic oath: First do no harm."

This admonition has particular relevance, if we may suggest, to the swaps business which Chairman Greenspan has aptly described in the following terms:

"...by far the most important event in finance during the past decade has been the extraordinary development and expansion of financial derivatives .... the reason for all this growth is that these new financial instruments are an increasingly important means of unbundling risks... a process that has undoubtedly improved national productivity, growth and standards of living."

Thank you for this opportunity to appear before the Committee today.


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