Today, the House Financial Services and Agriculture Committees held a joint hearing titled, “A Review of the Administration’s Proposal to Regulate the Over-the-Counter Derivatives Market,” at which U.S. Treasury Secretary Geithner testified on the Obama administration’s comprehensive regulatory framework for OTC derivatives markets. After briefly discussing the comprehensive set of reforms proposed by the administration in early June, Secretary Geithner focused his testimony on the various risks and challenges posed by the OTC derivatives markets, which has grown to over $20 trillion in market value. He cited the “apparent ease with which derivatives permitted risk to be transferred,” the complexity of OTC derivatives instruments and the lack of transparency in the OTC derivatives markets among these risks and challenges.
Building upon the broad objectives that the Obama administration had previously proposed with regard to the OTC derivatives market, Secretary Geithner identified the following steps to achieve these objectives:
- Require all standardized derivatives contracts to be cleared through central counterparties (CCPs) and executed on regulated exchanges or regulated electronic trading systems.
- Promote greater use of standardized OTC derivatives through strong capital requirements on customized products and other measures, by proposing a broad definition of “standardized” and identifying further attributes of standardized contracts, such as “a high volume of transactions in the contract and the absence of economically important differences between the terms of the contract and the terms of other contracts that are centrally cleared.”
- Require all OTC derivatives dealers and all other major OTC derivatives market participants to be subject to substantial supervision and regulation through conservative capital and margin requirements, recordkeeping and reporting requirements and strong business conduct standards.
- Make OTC derivatives markets fully transparent by allowing the public to have access to aggregated data on open positions and trading volumes.
- Provide the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) with clear authority to take enforcement action against fraud, market manipulation and other abuses in the OTC derivatives markets.
- In conjunction with the SEC and CFTC, tighten standards governing participation in the OTC derivatives markets.
- Work with international counterparts to ensure a similarly effective regime in other countries.
- Prevent OTC derivatives from being marketed inappropriately to unsophisticated investors.
Following his testimony, Secretary Geithner faced questions regarding various aspects of these proposed measures, including when contracts would be considered standardized and when they must be cleared. With respect to how clear delineation of authority between the SEC (overseen by the Financial Services Committee) and the CFTC (overseen by the Agriculture Committee), Secretary Geithner indicated that the Obama administration has been working with the SEC and the CFTC to “develop a sensible allocation of duties,” and is “striving to utilize each agency’s expertise, eliminate gaps in regulation, eliminate uncertainty about which agency regulates which types of derivatives, and maximize consistency of the regulatory approach of the two agencies.” Furthermore, when asked whether he would support a complete ban on “naked” credit default swaps, he stated, “I do not believe it is necessary or appropriate for us to ban them, but I want to underscore we do believe there needs to be comprehensive oversight of these markets."