Yesterday, Senator Jack Reed (D-RI), Chairman of the Senate Banking Committee's Subcommittee on Securities, Insurance, and Investments, introduced the Comprehensive Derivatives Regulation Act of 2009 (CDRA), legislation intended to “establish a comprehensive regulatory framework to prevent derivatives trading activities from ever again contributing to catastrophic failures in our financial system.” As proposed, the CDRA would:
- Clear standardized credit default swaps (CDS) and other unregulated derivatives through a clearinghouse, which is intended to protect the financial system from risks posed by these derivatives and allow regulators to oversee new derivatives products that may arise in the future;
- Establish robust capital and margin requirements for derivatives dealers and other major market participants, and establish higher standards for derivatives products not traded on clearinghouses;
- Establish new conduct, recordkeeping and reporting requirements for firms, intended to protect investors from abusive practices and provide regulators and investors with extensive information regarding derivatives transactions and positions across the financial sector;
- Provide regulators with new authority to set position limits and oversee the marketing of derivatives products to unsophisticated investors, and strengthen threshold requirements allowing sophisticated investors to engage in certain trading activities, in an effort to combat fraud and manipulation in the derivatives markets; and
- Reduce the jurisdictional overlap of the derivatives markets between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) by providing the SEC with jurisdiction over all derivatives that are securities (or can be used as synthetic substitutes for securities), providing the CFTC with jurisdiction over all other derivatives, and establish a process by which to promptly assign regulatory responsibility to the SEC or the CFTC for future derivatives products.
Senator Reed’s proposed legislation conceptually corresponds to the Treasury proposal, on which the House Agriculture Committee held a hearing yesterday, and the Concept Paper released by Congressmen Barney Frank and Collin Peterson a few months ago, in that it attempts to strengthen oversight standards and requirements with respect to derivatives trading activities. However, the Reed proposal expands the definition of “derivative” to include all derivative products, as opposed to Treasury’s proposal and the Concept Paper, which limit the definition of “derivative” to over-the-counter (OTC) derivatives. The Reed proposal further differs from the others with respect to the proposed delegation of authority between the SEC and the CFTC, in that it would give the SEC sole jurisdiction over securities-related derivatives. Additionally, the Reed proposal would require banking regulators to jointly draft rules with the CFTC and SEC to impose capital requirements for banks that participate in the derivatives market, whereas the Treasury proposal would only require that banking regulators consult with the SEC and CFTC in drafting such rules.