House Financial Services Committee Chairman Barney Frank (D-Mass.) released a legislative discussion draft on October 2 that would regulate the over-the-counter (OTC) derivatives markets. The draft bill is similar to the administration's OTC proposal that was released on August 11 but includes a number of key changes.

One of the main changes in Frank's draft is the exclusion from regulation of major market participants whose positions are held primarily for hedging or risk management purposes. In contrast, the much narrower related exclusion in the administration's proposal is limited to persons who maintain substantial net positions to create and maintain an effective hedge under generally accepted accounting principles. Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler and SEC Director of the Division of Risk, Strategy and Financial Innovation Henry Hu have criticized this particular change, noting that it would allow major companies that trade derivatives, such as Fannie Mae and Freddie Mac, to avoid regulation.

The House Financial Services Committee held a hearing on the OTC discussion draft on October 7. Frank noted that the proposal is still a work in progress and that he hoped to have the House vote on a bill by November.

We will continue to monitor the progress of the OTC draft bill and will provide more in-depth analysis as it approaches final form.

OTC Discussion Draft: available here (PDF)

Prepared Testimony and Archived Webcast: available here (HTML)

Press Release: Frank Circulates Discussion Draft of Legislation to Regulate OTC Derivatives (Oct. 2, 2009)

Story: Frank's Plan Criticized As Too Lax, Wall Street Journal (Oct. 8, 2009)

Administration Proposal: available here (PDF)