2nd UPDATE:Regulators Propose Better OTC Derivatives Oversight
(Updated with quotes from federal lawmakers).
By Sarah N. Lynch
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- U.S. regulators unveiled a plan Wednesday outlining a
new regulatory framework that would force some over-the-counter derivatives to
be traded on exchanges and subject some contracts to speculative position
limits.
The plan, which was announced jointly by Treasury Secretary Timothy Geithner,
Securities and Exchange Commission Chairman Mary Schapiro and Commodity Futures
Trading Commission acting Chairman Michael Dunn, aims to shed more light on off-
exchange trades, which are currently subject to very little federal regulation.
"As we lay out this broad framework, our staffs worked very carefully together
to try to make sure we present to Congress a common set of recommendations,"
Geithner said, noting that gaps in federal oversight over derivatives trading in
part contributed to the financial crisis.
Under the plan, federal commodities regulators would be given the authority to
set speculative position limits on both exchange-traded and over-the-counter
contracts if those contracts have a significant impact on market prices. The
goal behind that plan is to prevent manipulation or excessive speculation, which
some believe can accelerate price movements.
"We are proposing to give the SEC and the CFTC enhanced powers to prevent
manipulation," Geithner said. "We want to make sure they have the ability and
will act to make sure we are applying these protections against manipulation
across all markets."
The plan would also force all standardized over-the-counter contracts to be
traded on regulated exchanges and cleared - a process which involves standing
between buyers and sellers to guarantee money changes hands.
Highly customized contracts that are still traded off-exchange, meanwhile,
would be subject to record-keeping and reporting requirements.
"Central clearing for credit-default swaps and other over-the-counter
derivatives would bring to this market much-needed transparency," Schapiro said.
"Such transparency will enable regulators to better monitor transactions that
are effected through the use of a central counterparty. Importantly, central
clearing would also mitigate the systemic risks created by over-the-counter
derivatives."
In addition, derivatives dealers with large counterparty exposures would be
subject to prudent supervision and regulatory oversight to ensure they don't
pose systemic risks to the marketplace. This will entail more conservative
capital requirements, business-conduct standards, reporting requirements and
initial margin requirements on both standardized and over-the-counter contracts.
Some of these new rules governing dealers, Geithner explained, will serve to
protect "less sophisticated participants" in the market, such as municipalities,
many of which are now suffering financially after swap deals they used to hedge
against interest rate risk went bad.
The Commodity Futures Modernization Act of 2000 has allowed over-the-counter
derivatives, for the most part, to escape U.S. federal regulation. But the
financial crisis caused lawmakers and regulators to re-think that legislation
after an exotic financial instrument known as a credit-default swap nearly
caused the downfall of insurance giant American International Group (AIG).
Despite their limited authority to oversee over-the-counter trading,
securities and commodities regulators have argued for years about which agency
should have the jurisdiction to regulate them.
The plan unveiled Wednesday opted not to dive into that debate, instead
allowing each regulator to operate within their current regulatory framework.
Geithner said the idea behind the plan is to apply "a consistent set of
standards...applied evenly so there is a level playing field."
"A lot is made of the SEC and the CFTC not getting along," Dunn said. "I'm
here to tell you it's not that way anymore."
Geithner, Schapiro and Dunn have all previously voiced their support for some
new federal regulations of over-the-counter derivatives, echoing the calls for
mandatory clearing and more oversight.
Wednesday's announcement, however, is the first time the Obama administration
has laid out more specific details on its plans to regulate over-the-counter
derivatives.
Some House and Senate Democrats expressed optimism about the details in the
proposal, which Geithner laid out for them in a letter sent to lawmakers
Wednesday.
"It was time to put some meat on the bones, and the administration provided
some of that," said Sen. Carl Levin, D-Mich., who recently introduced a bill to
give regulators oversight of swaps. "The Geithner letter offers sound proposals
that should be acted on as soon as possible."
Sen. Tom Harkin, D-Iowa, meanwhile, called the plan a "step in the right
direction," although he noted there are "still more details that need to be
addressed." The plan outlined by regulators Wednesday does not go as far as
Harkin may like. He was tentatively slated to hold a hearing next week on a bill
that would essentially eliminate swaps by requiring them to all move onto
exchanges. It was unclear what may become of Harkin's proposal now, but a
committee spokesman said Harkin still plans to hold some hearings on derivatives
this year.
In a joint statement, House Agriculture Chairman Collin Peterson, D-Minn., and
House Financial Services Chairman Barney Frank, D-Mass., pledged to work
together to achieve the goals outlined in Geithner's letter. The House Financial
Services Committee has jurisdiction of the SEC while the House Agriculture
Committee oversees the CFTC.
Peterson's committee passed a bill earlier this year with some of the
provisions outlined Wednesday and sent it along to House Financial Services,
which has not yet voted on the measure.
- By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@
dowjones.com
(END) Dow Jones Newswires
05-13-091856ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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