On April 21, the Senate Committee on Agriculture, Nutrition and Forestry approved the Wall Street Transparency and Accountability Act of 2010 (the Bill) introduced by Chairman Blanche Lincoln. The Bill builds on, and is expected to replace, the Over-the-Counter Derivatives Markets Act, which is a part of the broader financial regulatory reform package approved by the Senate Banking Committee in March. As negotiations over financial regulatory reform continue, it is likely that the Bill will undergo additional changes before consideration by the full Senate, possibly as early as next week. Among other provisions, the Bill would:
- Effectively require banks to spin off their swap desks.
- Authorize the Commodity Futures Trading Commission and the Securities and Exchange Commission to adopt rules establishing criteria for determining that a swap or any group, category, type or class of swap is required to be cleared. The agencies may adopt these rules without complying with the provisions of the Administrative Procedure Act providing for notice and an opportunity for public comment.
- Require that any swap cleared through a derivatives clearing organization must be executed on a designated contract market or a swap execution facility.
- Provide a narrow exemption from the requirement that a swap be cleared for “commercial end users” to the extent such swaps are used to hedge commercial risk. A commercial end user is defined to mean any entity that, as its primary business activity, owns, uses, produces, processes, manufactures, distributes, merchandises or markets goods, services or commodities. Significantly, “financial entities” may not take advantage of this exemption.
- Extend the definition of a swap dealer to include any entity that regularly engages in the purchase and sale of swaps in the ordinary course of business.
- Impose a fiduciary duty on swap dealers to the extent they provide advice regarding, or enter into, a swap with a governmental agency, pension plan, endowment or retirement plan.
- Specifically exclude from the definition of a major swap participant any employee benefit plan (or any contract held by such a plan) as defined in paragraphs (2)(A) and (32) of Section 3 of the Employee Retirement Income Security Act of 1974 for the primary purpose of hedging or mitigating any risk directly associated with the operation of the plan.
- Require that any person that accepts customer funds in connection with cleared swaps must be registered with the CFTC as a futures commission merchant and must hold such funds in a segregated account comparable to the customer segregated account for customer transactions executed on a designated contract market.
The Wall Street Transparency and Accountability Act of 2010 can be accessed here.