The Department of the Treasury sent the final piece of its financial regulatory reform legislation to Capitol Hill , a 115-page bill aimed at reforming regulation of over-the-counter derivatives.
“These markets have largely gone unregulated since their inception,” the Treasury Department said in a release. “Enormous risks built up in these markets, substantially out of the view or control of regulators, and these risks contributed to the collapse of major financial firms in the past year and severe stress throughout the financial system,” the release said.
Under the legislation, the OTC derivative markets would be regulated in a comprehensive way for the first time, including regulation of OTC derivatives dealers and other major market participants.
Regulation of credit default swaps markets would be aimed at guarding against activities posing excessive risk to the financial system, and at preventing market manipulation, fraud, insider trading and other abuses. Regulation also would seek to ensure that OTC derivatives are not marketed inappropriately to unsophisticated parties, including small municipalities.
The legislation would require standardized OTC derivatives to be centrally cleared by a derivatives clearing organization regulated by the
Commodity Futures Trading Commission or a securities clearing agency regulated by the Securities and Exchange Commission.
OTC dealers and market participants that are banks would be regulated by federal banking agencies. OTC derivatives dealers and market participants that are not banks would be regulated by the CFTC and the SEC.
To improve transparency and market efficiency, standardized OTC derivatives would be required to be traded on exchanges or on regulated swaps execution facilities.
Customized derivatives would be subject to higher capital and margin requirements to encourage standardization, said Michael Barr, assistant secretary for financial institutions at the Treasury Department. He spoke to reporters in a telephone briefing on the legislation today.
“More product will be moved into the standardized space,” as the legislation would impose a broad definition of standardized products, in addition to the higher capital and margin requirements for customized products, Mr. Barr said.
For companies that need customized products, “We want to make sure that there's an appropriate regulatory regime, but one that doesn't stifle the marketplace,” he said. Full reporting into a trade repository would be required, along with aggregated data released to the public, and specific information would have to be reported to regulators for customized transactions, Mr. Barr said.
“It is a comprehensive reform going right to the very heart of the problems that we saw in the last crisis to block any kind of future [American International Group Inc. of New York] problems from arising in the system,” he said.
