The US Treasury Department's legislative proposal to regulate the over-the-counter (OTC) derivatives market will likely be the starting point for the US House of Representatives bill that is expected to be released in the fall, said Rep. Scott Garrett (R-NJ), the ranking member of the Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee, on September 15.
It appears that the Treasury's proposal, rather than the outline that House Financial Services Committee Chairman Barney Frank and House Agriculture Committee Chairman Collin Peterson agreed upon, will serve as the base document for the bill the House will be considering, said Garrett in his keynote address to the International Swaps and Derivatives Association (ISDA) Regional Member Conference.
SEC Chairman Mary Schapiro and Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler presented their views of the Treasury proposal on September 22 at a House Agriculture Committee hearing. In their prepared testimony, both Gensler and Schapiro called the proposal an "important step" toward comprehensive regulation of the OTC derivatives markets, but also advocated certain revisions to it.
Gensler, echoing a letter he sent to lawmakers in August following the release of the Treasury draft, specifically called for eliminating the exceptions in the bill for certain OTC products and dealers, providing the SEC and CFTC with expanded enforcement and rulemaking authority, and imposing requirements that dealers and counterparties set aside money to back up trades.
Schapiro repeated Gensler's most significant suggestions with approval, while also suggesting some additional "enhancements." These include regulating all OTC derivatives like their underlying "references" in order to minimize the potential for regulatory arbitrage, and raising the qualification standards for participation in the OTC derivatives markets.
The Treasury released the draft legislation on August 11 as part of the legislative regulatory reform package that the Obama administration promised 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 bill places joint enforcement authority in the hands of the SEC and the CFTC, generally according to their authority over the underlying assets.
Garrett keynote address: available here
Gensler prepared testimony: available here
Schapiro prepared testimony: available here
Proposed Treasury legislation: available here
Peterson/Frank outline: available here
Related client alert: available here