The House Financial Services Committee has approved legislation that would require regulation of the over-the-counter derivatives market.
The bill, approved by a vote of 43-26, is a key component of a broader effort by the Obama administration to overhaul the financial regulatory system.
Under the derivatives bill, all standardized swap transactions between dealers and large market participants, referred to as major swap participants, would have to be cleared and must be traded on an exchange or electronic platform. A major swap participant is defined as anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions create such significant exposure to others that it requires monitoring. OTC derivatives include swaps, which are contracts that call for an exchange of cash between two counterparties based on an underlying rate, index, credit event or the performance of an asset.
The legislation then sets out parallel regulatory frameworks for the regulation of swap markets, dealers, and major swap participants. Rulemaking authority is held jointly by the Commodity Futures Trading Commission, which has jurisdiction over swaps, and the Securities and Exchange Commission, which has jurisdiction over security-based swaps.
The Treasury Department is given the authority to issue final rules if the CFTC and SEC cannot decide on a joint approach within 180 days. Subsequent interpretations of rules must be agreed to jointly by the commissions.
The committee has also begun deliberating over the next stage of the financial regulatory overhaul, the creation of a Consumer Financial Protection Agency, which has been the subject of fierce lobbying by the financial services industry and other industries. Committee chairman Barney Frank, D-Mass., has already agreed to scale back the original plan, exempting accountants, real estate brokers and agents, retailers, auto dealers, cable and telephone companies, and consumer-reporting agencies from jurisdiction by the new agency. Community banks with less than $10 billion in assets would also be exempted.
Like the Consumer Financial Protection Agency legislation, the committee also scaled back the derivatives bill. It makes an exception for companies that use swaps for hedging commercial risk. Their swaps would not have to pass through clearing houses or exchanges, and regulators would not need to set margin requirements for the trades. Instead dealers would have to set aside more capital to cover the trade.
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