The US Treasury Department released on August 11 draft legislation that seeks to regulate the over-the-counter (OTC) derivatives market. The proposed legislation is another piece of the legislative regulatory reform package that the Obama administration promised on June 17 to send to Congress.

The proposed legislation's most significant provisions include the central clearing and trading of standardized derivatives; increased capital and margin requirements on customized derivatives; confidential reporting requirements on all derivative trades to a central repository and public access to aggregate data on open positions and trading volumes.

The proposed legislation places oversight of the OTC markets in the hands of the Securities Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) based on their current jurisdictions, and calls on them to jointly adopt certain rules, including defining a "standardized" derivative. The proposed legislation also assigns significant responsibility to banking regulators and the Treasury. Namely, the Treasury would be in charge of resolving any jurisdictional conflicts between the SEC and CFTC. In addition, when the two agencies are unable to agree on jointly adopted rules within a certain time period, the proposed legislation calls on the Treasury to provide temporary regulation while any disputes are resolved. Federal banking agencies would also be in charge of setting the margin and capital requirements for customized derivatives.

The proposed legislation provides an exception for firms that are not swaps dealers or major market participants from its trading and clearing requirements. It also excludes certain types of transactions, most notably foreign currency swaps. In a letter dated August 17, CFTC Chairman Gary Gensler called on the House Financial Services and Agriculture Committees to eliminate these exceptions. Gensler stated in the letter that he believes that "the law must cover the entire marketplace without exception," and that excluding foreign-currency swaps from the legislation would allow dealers to structure swaps that avoid regulation.

Proposed Legislation: available here (PDF)

Treasury Press Release: Administration's Regulatory Reform Agenda Reaches New Milestone: Final Piece of Legislative Language Delivered to Capitol Hill (August 11, 2009)

Story: Gensler Seeks to Toughen Obama's Derivatives Bill, Bloomberg (August 19, 2009)