On May 4, 2009, Senators Carl Levin (D-MI) and Susan Collins (R-ME) launched another salvo in the battle over derivatives regulation with their introduction of the “Authorizing the Regulation of Swaps Act” (the Swaps Act). The Swaps Act seeks to dramatically alter the regulatory landscape by providing Federal financial regulators with immediate oversight of all swap markets. This far-reaching authority is achieved by removing all current exemptions provided to derivatives transactions under Federal statute.

The Swaps Act repeals provisions in Federal securities and commodities laws that exempt a variety of derivatives from full regulation under such laws. Included in these revisions are the elimination of the “security-based swaps” exemptions under the Securities Act of 1933 and the Securities Exchange Act of 1934, passed as part of the Gramm-Leach-Bliley Act, as well as the Commodity Futures Modernization Act of 2000 statutory exemption from full regulation for swap contracts under the Commodity Exchange Act. Under the Swaps Act, all swap contracts, whether privately negotiated “over-the-counter” or transacted on an exchange, would be subject to broader Federal regulation.

While the Swaps Act opens up the entire derivatives industry to expansive Federal regulation, it does not specify how swaps should be regulated or which regulators should take a leading role. The Swaps Act confers authority on the U.S. Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the U.S. Securities and Exchange Commission, and “any other Federal agency that is authorized under any provision of Federal law to regulate any financial institution or type or class of financial instrument or offering thereof.” Each Federal regulator is called upon by the Swaps Act to regulate all swaps within its regulatory jurisdiction and is required to “consult, work, and cooperate with each other to promote consistency in the treatment of swap agreements.”

Senators Levin and Collins presented their bill as a stopgap measure, providing immediate regulation of derivatives in advance of more comprehensive regulation of the entire financial industry.1 Understanding that broad changes to regulation of the financial system as a whole will take significant time, Senators Levin and Collins stated that the Swaps Act can quickly “…bring transparency, accountability, and stability to financial markets that are badly in need of all three, and where government oversight is now prohibited by laws proven to have been a mistake.”

The Swaps Act reflects a sentiment widespread among legislators in Washington that under- or unregulated derivatives instruments are to blame for recent turmoil in the nation’s financial markets. The proposal seems to reflect a lack of legislative awareness of the current broad authority of Federal bank, securities and commodities regulators to regulate the derivatives activities of institutions subject to their oversight, including banks, broker dealers, futures commission merchants, mutual funds, and commodity pools, as well as the antifraud, disclosure and other regulatory authority that currently exists with respect to transactions in the over-the-counter market. We will continue to monitor legislative and regulatory developments and keep you abreast of all relevant changes.