Last Friday, Congressman Collin Peterson (D-MN), Chairman of the House Agriculture Committee, released a discussion draft of proposed legislation to strengthen the regulation of the over-the-counter (OTC) derivatives market. The proposed legislation largely reflects the principles outlined in theconcept paper jointly released by Congressman Barney Frank (D-MA), Chairman of the House Financial Services Committee, and Congressman Peterson a few months ago, and attempts to reconcile the concerns raised at the hearings held by the House Agriculture Committee late last month. The House Agriculture Committee prepared a table comparing Congressman Peterson’s proposal, Congressman Frank’s discussion draft of proposed legislation circulated earlier this month, and the Obama administration’s proposal released in August. Key points from the table are summarized below.
For almost all rules concerning swap and security-based swap-related provisions, the Obama and Frank proposals provide joint rulemaking authority between the Commodity Futures Trading Commission and the Securities and Exchange Commission. When the CFTC and SEC cannot reach agreement, the Treasury Department would intercede and write rules. Congressman Peterson’s proposal allocates primary rulemaking authority to the CFTC with respect to swap-related provisions and to the SEC with respect to security-based swap provisions, though each agency would be required to consult with the other on the rules. Under the Peterson proposal, in the event that the CFTC and SEC disagree, either agency would be able to initiate an expedited action in the U.S. Court of Appeals for the District of Columbia to challenge the other agency’s rules “that encroach on the initiating agency’s jurisdiction or allow for disparate treatment of economically similar products or participants.”
Similar to the Obama administration’s proposal, Congressman Peterson’s draft legislation leaves it to derivatives clearing organizations (DCOs) and clearing agencies to determine which swaps would require clearing. Swaps that have been accepted by a DCO or clearing agency would be required to be cleared under Congressman Peterson’s proposal, unless (i) one of the counterparties is not a swap dealer or major swap participant and can demonstrate appropriate business and risk management practices for non-cleared swaps and security-based swaps and (ii) neither counterparty is a Tier 1 financial holding company. Congressman Frank’s proposal would allow the CFTC and the SEC to jointly determine which products must be cleared, based on enumerated factors. Congressman Peterson would subject foreign exchange swaps to the requirements of the legislation, but would exclude foreign exchange forwards in some circumstances. The Obama administration’s proposal and Congressman Frank’s proposal would exclude both foreign exchange swaps and foreign exchange forwards from the legislative requirements.
The Obama proposal requires that all cleared swaps be traded on regulated exchanges or alternative swap execution facilities with no exceptions. The Frank proposal provides no mandatory trading requirement for cleared swaps. The Peterson proposal does not require that cleared swaps be traded on regulated exchanges or alternative swap execution facilities if no such exchange or execution facility will list the swap. Unlike the other two proposals, the Peterson proposal does not impose higher capital requirements on swap dealers or major swap participants for non-cleared swaps, but rather authorizes regulators to determine appropriate capital requirements for such dealers or participants based upon the risk associated with such non-cleared swaps.
The proposals are aligned on the issue of setting position limits for swaps. All of the proposals authorize the CFTC and SEC to impose position limits on swaps and security-based swaps that “perform significant price discovery functions” and in order to “prevent fraud and manipulation.” The agencies are also authorized to require aggregate position limits across markets under each proposal.