On June 4, 2009, the Senate Agriculture Committee held a hearing entitled “Regulatory Reform and the Derivatives Markets,” at which Chairman Gary Gensler of the Commodity Futures Trading Commission (CFTC) proposed a comprehensive regulatory framework to govern over-the-counter (OTC) derivatives dealers and OTC derivatives markets, regardless of what type of derivative is traded currently or in the future and whether the derivative is standardized or customized. Chairman Gensler stated that the regulatory framework governing OTC derivatives should achieve the following four key objectives:
- Reduce systemic risks;
- Promote transparency and efficiency of markets;
- Promote market integrity by preventing fraud, manipulation and other market abuses and by setting position limits; and
- Protect the public from improper marketing practices.
In a novel proposal, Chairman Gensler recommended that two complementary regulatory regimes should be implemented – one targeted towards the derivatives dealers, and the other targeted towards the derivatives markets, including regulated exchanges, electronic trading systems and clearinghouses. With respect to the institutions that deal in derivatives, he proposed that the Commodity Exchange Act be amended “to provide for the registration and regulation of all derivatives dealers” and that all derivatives dealers be subject to capital requirements, initial margining requirements, business conduct rules and reporting and recordkeeping requirements. To promote transparency and market integrity and reduce systemic risks in the derivatives markets themselves, Chairman Gensler proposed that “all derivates that can be moved into central clearing be required to be cleared through regulated central clearinghouses and brought onto regulated exchanges or regulated transparent electronic trading systems.” The CFTC should have the ability to impose position limits, including aggregate limits, “on all persons trading OTC derivatives that perform or affect a significant price discovery function with respect to regulated markets.” Chairman Gensler concluded his testimony by proposing that the CFTC be granted “positive new authority” to regulate OTC derivatives.
The following witnesses also testified at the hearing:
- Lynn Stout, Professor, UCLA School of Law
- Mark Lenczowski, Managing Director, JPMorgan Chase & Co.
- Dr. Richard Bookstaber
- Dr. David Dines, Cargill Risk Management
- Michael Masters, Masters Capital Management, LLC
- Daniel Driscoll, Executive VP and COO, National Futures Association
Each witness provided testimony on whether and how they believed the derivatives industry should be regulated.
