CORRECT: 2nd UPDATE:Treasury Sends Draft Derivatives Bill To Congress
August 11 2009 - 6:00PM
Dow Jones News
The Obama administration on Tuesday outlined a sweeping
regulatory plan to oversee over-the-counter derivatives that dodges
a regulatory turf battle by spreading responsibilities across
several federal agencies.
The 115-page draft bill appears to recognize the political
quagmire that would likely ensue if the plan tried to cut any
regulators out of the picture. Although it would give the bulk of
the proposed new powers over derivatives to the Securities and
Exchange Commission and the Commodity Futures Trading Commission,
it also aims to keep banking regulators in the mix by granting them
authority to oversee the banks that deal in derivatives.
The legislation doesn't stray far from what Treasury Secretary
Timothy Geithner first outlined in May, but it details for the
first time how authority among federal regulators would be divided.
In a concession to small market players, the bill has an exemption
easing margin requirements for some hedging transactions.
The bill, which was sent to Capitol Hill for consideration, aims
to reduce the risks that derivatives may pose "to the financial
system and reduce the likelihood they could be used to engage in
inappropriate business conduct or to hurt investors," said Michael
Barr, the Assistant Secretary of the Treasury for Financial
Institutions. It is the last in a series of draft bills the
administration has submitted to help avert another financial
crisis.
The proposal would require standardized derivative contracts to
be processed through clearinghouses, which guarantee trades and
help cushion against the blow of a potential default. Off-exchange
derivatives are sold both as highly customized products and more
standardized contracts that closely mirror products traded on
exchanges.
Additionally, the bill also would require standard products be
traded on exchanges or regulated electronic execution facilities to
help improve price transparency - a move that may irk some in the
industry.
As for customized products not suitable for clearing, the
Treasury Department said Tuesday those would face higher capital
and margin requirements as a way of enticing traders onto exchanges
and electronic platforms.
Information about all derivatives, meanwhile, would be reported
to a central repository to help regulators police the market.
In addition, major market players and non-bank derivative
dealers would be regulated by the CFTC and SEC, while big banks
that deal derivatives would continue to be subject primarily to
oversight by their current banking regulators.
The Federal Reserve, meanwhile, would not lose its current
authority to regulate IntercontinentalExchange's (ICE) ICE Trust -
the only operable clearinghouse for credit-default swaps in the
U.S. Under the plan, it would simply share that oversight with the
other relevant regulators, Barr said.
To avoid the turf wars that have historically dogged the SEC and
CFTC, Treasury officials said the bill breaks down the jurisdiction
based upon the same principles the agencies have relied on now for
well over a decade.
That means the CFTC and SEC would, for instance, each get a
slice of the large credit-default swap market.
"The basic line is if a credit-default swap is on a broad-based
index, it would be subject to CFTC jurisdiction," Barr said. "If it
is on a single-stock or less likely on a narrow-based index, it
would be subject to SEC jurisdiction."
The bill would also give the agencies joint rule-making
authority to help avoid "regulatory arbitrage" and allow them to
help set the terms for when a contract is considered "standard" and
therefore able to be cleared and traded.
Additionally, the CFTC and SEC under the Obama plan would get
new powers to impose trading limits on certain over-the-counter
products that help set market prices - the very power CFTC Chairman
Gary Gensler has been asking for in his quest to impose sweeping
new position limits on traders who place bets on energy prices.
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634;
sarah.lynch@dowjones.com