Today, the U.S. Treasury Department released a proposal, also submitted in a letter to Congressional leaders, which contemplates a comprehensive regulatory framework for all over-the-counter (OTC) derivatives, largely because “massive risks in derivatives markets have gone undetected by both regulators and market participants.” Also participating in the press conference announcing Treasury's propsoal were SEC Chairman Mary Shapiro and CFTC CFTC Acting Chairman Michael Dunn. In addition to working with Congress to implement this framework, Treasury intends to coordinate with foreign authorities to ensure that its objectives “are not undermined by the movement of derivatives activity to jurisdictions without adequate regulatory safeguards.”
The objectives of regulatory reform of the OTC derivatives markets, and the manner in which these objectives will be implemented, are as follows:
- Preventing activities within the OTC markets from posing risks to the financial system by amending the Commodity Exchange Act (CEA) and securities laws to require clearing of all standardized OTC derivatives through regulated central counterparties (CCPs) and by subjecting all OTC derivatives dealers who create large exposures to counterparties to a “robust regime of prudential supervision and regulation,” including conservative capital requirements, reporting and margin requirements and business conduct standards.
- Promoting efficiency and transparency of OTC markets by amending the CEA and securities laws to authorize the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to “impose recordkeeping and reporting requirements and requirements for all trades not cleared through CCPs to be reported to a regulated trade repository,” and promote the movement of standardized trades onto regulated exchanges and transparent electronic trade execution systems and the development of a system for timely reporting and dissemination of trade and pricing information.
- Preventing market manipulation, fraud and other market abuses by amending the CEA and securities laws to ensure that the CFTC and SEC have clear authority to prosecute fraud, market manipulation and other market abuses, authority to set position limits on OTC derivatives that perform a significant price discovery function in the futures markets, and a complete and accurate picture of market information from CCPs, trade repositories and market participants.
- Ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties by imposing more stringent limits on types of counterparties that may participate in OTC derivatives markets and “additional disclosure requirements or standards of care with respect to the marketing of derivatives to less sophisticated counterparties.
”Treasury has not released the text of any proposed legislation, but it appears from Treasury's description that the Obama administration's proposals may differ in important respects from legislation proposed in the Senate and the House.