The Obama Administration delivered legislative language to Congress in mid-August that details regulatory reform of OTC derivatives. The proposed legislation follows up on the discussion of OTC reform in the Administration’s white paper, “Financial Regulatory Reform: A New Foundation.” As part of the Administration’s proposed legislation, credit default swap markets and all other OTC derivative markets will be subject to comprehensive regulation.

Specifically, the proposals would require that standardized OTC derivatives be centrally cleared by a derivatives clearing organization regulated by the CFTC or a securities clearing agency regulated by the SEC. Similarly, standardized OTC derivatives will have to be traded on a CFTC- or SEC-regulated exchange or alternative swap execution facility.

In addition, the legislation will require higher capital and margin requirements for nonstandardized derivatives, in an effort to facilitate substantial migration of OTC derivatives onto central clearinghouses and exchanges. At the same time, any OTC derivative that is accepted for clearing by any regulated central clearinghouse will be presumed to be standardized.

The legislation also requires transparency for all OTC derivative markets by giving all relevant federal financial regulatory agencies access (on a confidential basis) to the OTC derivative transactions and related positions of individual market participants. Likewise, the public would have access to aggregated data on open positions and trading volumes.

The proposed legislation also would regulate any firm that deals in OTC derivatives and any other firm that takes large positions in OTC derivatives. Those dealers and major market participants that are banks would be regulated by the federal banking agencies, while those that are not would be regulated by either the CFTC or SEC.