Yesterday, Congressman Barney Frank (D-MA), Chairman of the House Committee on Financial Services, and Congressman Collin Peterson (D-MN), Chairman of the House Committee on Agriculture, released a concept paper on principles for over-the-counter derivatives legislation to be developed by the two Congressional Committees.
Under the principles outlined in the concept paper, clearing of over-the-counter derivatives would be mandatory, with exceptions to mandatory clearing for transactions which the appropriate regulator determines are not standard or for which neither party is a major market participant. Capital and margin requirements would be generally strengthened, with higher requirements applying to non-standard products, to encourage the use of exchanges, electronic trading platforms, and central clearing. Clearinghouses would be highly regulated.
The Congressmen also called for “particular attention to speculation,” either by prohibiting most purchases of credit protection through credit default swaps (CDS) where the buyer of protection does not have a real ecomonic interest to be protected by the CDS or by requiring “confidential reporting to the appropriate regulator of all short interest in CDS contracts.”
Additionally, the principles in the concept paper would require oversight of derivative dealers, exchanges and clearinghouses by the SEC or CFTC, depending on the derivative’s underlying asset. A Financial Services Oversight Council would “resolve disputes between the SEC and CFTC” over authority and joint regulation over new products.
The concept paper anticipates coordination with foreign regulators to harmonize regulations. In addition, institutions from foreign jurisdiction which impose lower capital standards than the U.S. could be restricted in their access to the U.S. banking system.