Schapiro: SEC mulls reporting of OTC derivative trades

Agency weighing whether product comes under Securities Exchange Act

Jun 22, 2009 @ 3:24 pm

By Sara Hansard

The Securities and Exchange Commission is considering whether trading in over the counter derivatives should be reported like other securities transactions, SEC Chairman Mary Schapiro told a congressional subcommittee today.

“The SEC is considering whether reporting under the [Securities Exchange Act] should apply to security-based [over the counter] derivatives so that the ownership of and transactions in security-based derivatives would be considered ownership and transactions in the underlying equity security,” she said in testimony prepared for a hearing held by the Senate Banking Committee’s Subcommittee on Securities, Insurance and Investment. The subcommittee held a hearing on regulating OTC derivatives.

The SEC is also evaluating whether those who use equity derivatives, including equity swaps, should be subject to the ownership-reporting provisions of the Exchange Act when they accumulate substantial share positions in connection with some transactions that change control of securities, Ms. Schapiro said.

Because many securities-related OTC derivatives can trade without coming under securities regulations, the SEC is not able to require transparency in trading the products, she said. “Manipulative activities in the markets for securities-related OTC derivatives can affect U.S. issuers in the underlying equity market,” damaging public perception of the companies and raising their cost of capital, Ms. Schapiro said in her prepared remarks.

Congress should subject securities-related OTC derivatives to the federal securities laws, she said. Major participants in OTC derivatives markets should be subject to oversight to ensure that there are no gaps in regulation, Ms. Schapiro said.

Responsibility for regulating the largest OTC derivatives markets — those related to interest rates, foreign exchange, commodities, energy and metals — should be with the Commodity Futures Trading Commission, she said. Primary responsibility for overseeing securities-related over the counter derivatives should be held by the SEC, Ms. Schapiro said.

“The exclusion of certain securities-related OTC derivatives from most of the securities regulatory regime has detracted from the SEC’s ability to uphold its investor protection mandate,” she told the subcommittee. While the SEC has used its anti-fraud authority over securities-based swaps to get information about OTC-derivatives transactions, investigations of such transactions “have been far more difficult and time-consuming than those involving cash equities and options,” Ms. Schapiro said.

The regulatory-reform proposal outlined last week by the administration includes more regulation of over the counter derivatives, which played a major role in the current financial crisis. Power for regulating OTC-derivatives markets would be shared by the SEC and the CFTC under the administration plan.

For all OTC derivatives, Ms. Schapiro cited data that there was a notional amount outstanding of $592 trillion and a gross market value of $34 trillion in December 2008. Securities-related credit derivatives and equity derivatives amounted to a notional amount outstanding of $48.4 trillion with a gross market value of $6.8 trillion, she said. Interest rate and foreign-exchange contracts are the two largest sources of OTC-derivatives volume, Ms. Schapiro said.


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