Treasury Secretary Calls For New Regulation Over OTC Derivatives Administered By The SEC And CFTC
Treasury Secretary Tim Geithner sent a letter to Senate Majority Leader Harry Reid yesterday calling for a new regulatory framework for the over-the-counter derivatives market. Authority over those markets would, under the Secretary’s proposal, be shared by the SEC and the CFTC. The Secretary also held a joint press conference with the Chairman of the SEC and CFTC. A Treasury Department press release outlines the proposals.
In his letter, Mr. Geithner outlined four key principles to be achieved in bringing regulation to this largely unregulated segment of the market: 1) preventing activities in those markets from posing a risk to the financial system; 2) promoting efficiency and transparency; 3) preventing market manipulation and fraud; and 4) ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties.
To achieve these goals, Mr. Geithner is requesting that Congress amend the CEA and the securities laws to require a clearing of all standardized OTC derivatives through regulated central counterparties. A key element of this new system should be a “robust regulatory regime,” which includes conservative capital requirements, business conduct standards, reporting requirements and conservative requirements relating to initial margins for all OTC derivatives dealers and all other firms that create large exposures to counterparties. Those trades not cleared by CCPs would be reported to a regulated trade repository which would maintain data on open positions and trade volumes. The data would be available to the public.
The amendments to the CEA and the securities laws should also include authorization to the CFTC and the SEC “consistent with their respective missions” to impose recordkeeping and reporting requirements along with an appropriate audit trail on all OTC derivatives. In addition, the necessary amendments to those statutes should be made “to ensure that the CFTC and the SEC, consistent with their respective missions, have clear, unimpeded authority to police fraud, market manipulation, and other market abuses involving all OTC derivatives.” This would include giving the CFTC authority to set position limits.
The SEC and the CFTC are currently working on proposed amendments to achieve these goals.