9.22.2009 SEC Chairman Mary Schapiro testified before the House Committee on Agriculture on the regulation of over-the-counter (OTC) derivatives and, in particular, the Over-the-Counter Derivatives Markets Act of 2009, proposed in August by the Treasury. Chairman Schapiro discussed how the Treasury’s proposal could be strengthened to avoid regulatory gaps and eliminate regulatory arbitrage opportunities:

  • Minimize regulatory arbitrage and gaming opportunities by regulating swaps like their underlying “references”;
  • Strengthen existing anti-fraud and anti-manipulation authority;
  • Consider clarifying that the definition of “security-based swap” includes not only single-name and narrow-based index credit default swaps (CDS), but also broad-based index CDS, and other similar products, when payment is triggered by a single security or issuer or narrow-based index of securities or issuers;
  • Strengthen the authority of the SEC, the Commodity Futures Trading Commission (CFTC), and other regulators to adopt business conduct rules for dealers and major participants in the OTC derivatives markets so that the SEC and CFTC may adopt stronger and more protective rules in certain situations;
  • Consider revising the qualification standards for participation in the OTC derivatives markets;
  • Provide legal restrictions on how counterparty assets held by OTC derivatives dealers and other major market participants would be treated in the event of an insolvency, as well as indicate the extent to which counterparties would have a prior claim on the other assets of the estate; and
  • Ensure that the “Identified Banking Products” exception is not abused, by revising it to make clear that it is not available to foreign banks or their subsidiaries that are not subject to federal banking oversight.

Click http://www.sec.gov/news/testimony/2009/ts092209mls.htm to access the testimony.