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Obama Wants SEC, CFTC to Police Derivatives

WASHINGTON — The Securities and Exchange Commission and Commodity Futures Trading Commission should get “clear, unimpeded authority to police and prevent fraud” in the derivatives markets, according to a new Obama administration proposal.

The administration also wants new record-keeping and reporting requirements on all over-the-counter derivatives as part of its proposed revamp of financial regulators.

“All OTC derivatives markets, including CDS (credit default swaps) markets, should be subject to comprehensive regulation that addresses relevant public policy objectives,” according to a near-final draft of the regulator plan.

The proposal, obtained Tuesday evening, was being circulated through Washington ahead of President Barack Obama’s announcement of a major proposed rewrite of U.S. financial regulations. Many of the proposals would require Congress to act, so significant changes are likely.

The Obama proposal touches on regulation of banking, securities, mortgages and other financial products. For derivatives, the plan describes core principles, such as “preventing activities in those markets from posing risk to the financial system.” It also seeks to promote the efficiency and transparency while preventing market manipulation, fraud, and other market abuses. The plan also seeks to ensure “that OTC derivatives are not marketed inappropriately to unsophisticated parties.”

It calls for ensuring the SEC and CFTC “have clear, unimpeded authority to police and prevent fraud, market manipulation, and other market abuses involving all OTC derivatives.”

Earlier Tuesday, a senior Obama administration official said the government plans to regulate and standardize oversight of over-the-counter derivatives, register “hedge funds and other private pools of capital.”

Currently, there is no comprehensive, direct regulation of the over-the-counter derivatives market.

The Commodity Futures Modernization Act of 2000 prevented the Securities and Exchange Commission and the Commodity Futures Trading Commission from directly regulating swaps, although the SEC has some anti-fraud authority on security-based swaps. Banking regulators also may look at swap data as part of their routine regulatory supervision of banks.

In addition, some products like energy swaps traded electronically on exempt commercial markets may be overseen by the CFTC if they help set market prices.

Processing swaps through clearinghouses, which guarantee trades and cushion the market impact in the event of a default, is only voluntary right now. Swaps can be traded electronically or via telephone.

The Obama regulatory plan proposes to require “all standardized OTC derivative transactions to be executed in regulated and transparent venues and cleared through regulated central counterparties.”

To improve price transparency, standard products would also be moved onto exchanges or electronic trade execution systems. Trading of over-the-counter customized products would still be allowed, but regulators will for the first time have authority to collect data on these trades.

“Key elements of that robust regulatory regime must include conservative capital requirements (more conservative than the existing bank regulatory capital requirements for OTC derivatives),” the plan said. Other elements would include business conduct standards, reporting requirements, “and conservative requirements relating to initial margins on counterparty credit exposures.”

The plan calls for amending commodities and securities laws “to authorize the CFTC and the SEC, consistent with their respective missions, to impose recordkeeping and reporting requirements (including an audit trail) on all OTC derivatives.”

In addition, the CFTC will for the first time be able to set position limits on over-the-counter derivatives if they help set market prices.

From Rob Wells at and Sarah N. Lynch at the Wall Street Journal

Jean Viry-Babel
senior partner
VBK partners

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