Yesterday, the Subcommittee on Securities, Investment and Insurance of the Senate Banking Committee held a two-panel hearing entitled the “Over-the-Counter Derivatives: Modernizing Oversight to Increase Transparency and Reduce Risks.” The following witnesses testified at the hearing:
- Mary Schapiro, Chairman, U.S. Securities and Exchange Commission
- Gary Gensler, Chairman, U.S. Commodity Futures Trading Commission
- A. Patricia White, Associate Director of the Division of Research and Statistics, Board of Governors of the Federal Reserve System
- Henry Hu, Allan Shivers Chair in the Law of Banking and Finance, University of Texas School of Law
- Kenneth C. Griffin, Founder, President, and Chief Executive Officer, Citadel Investment Group, L.L.C.
- Robert G. Pickel, Executive Director and Chief Executive Officer, International Swaps and Derivatives Association, Inc.
- Christopher Whalen, Managing Director, Institutional Risk Analytics
SEC Chairman Schapiro stated that “U.S. regulatory authorities have reached a broad consensus on the pressing need for a comprehensive regulatory framework for OTC derivatives.” She further outlined a regulatory scheme in which “primary responsibility for “securities-related” OTC derivatives would be retained by the SEC, which is also responsible for the oversight of markets affected by this subset of OTC derivatives,” while “primary responsibility for all other OTC derivatives, including derivatives related to interest rates, foreign exchange, commodities, energy and metals, would rest with the CFTC.” To support that proposal, Chairman Schapiro noted that the SEC’s mandates regarding investor protection, maintenance of fair and orderly markets and the facilitation of capital formation would align “directly and powerfully” with SEC oversight of the securities-related OTC derivatives markets. To bring securities-related OTC derivatives under the purview of SEC regulation, Chairman Schapiro proposed that the definition of “security” be clarified to expressly include securities-related OTC derivatives, that non-bank OTC derivatives dealers in securities-related derivatives be subject to supervision and regulation by the SEC, and that trading markets and clearing organizations for securities-related OTC derivatives be subject to SEC registration requirements as exchanges and clearing agencies.
Chairman Gensler focused on his proposal regarding the regulation of derivatives that he announced earlier this month, which calls for the implementation of two complementary regulatory regimes – one targeted towards the derivatives dealers, and the other targeted towards the derivatives markets, including regulated exchanges, electronic trading systems and clearinghouses. While he acknowledged that close cooperation between the SEC and the CFTC would be required “to ensure the most appropriate regulation” for the OTC derivatives market, he did not identify where the jurisdictional lines between the two agencies should be drawn, as Chairman Schapiro did.
All of the other witnesses that testified were in favor of some form of regulatory oversight of the OTC derivatives markets, and several of them advocated for central counterparty clearing of standardized OTC derivatives. Echoing his testimony earlier this month in front of a subcommittee of the House Financial Services Committee, ISDA CEO Pickel stated that “while there is widespread recognition of the benefits of clearing, there is also widespread acknowledgment, including in the Administration’s proposal, that there is a continued need for customized OTC derivatives.”