The Obama administration and the Treasury Department are calling for greater regulatory control of the over-the-counter derivatives market.

Among the proposed changes are amending the Commodity Exchange Act and the securities laws to allow the SEC and the Commodity Futures Trading Commission to impose recordkeeping and reporting requirements, including audit trails, on financial firms that engage in derivatives trading. All trades not cleared by clearing counterparties would need to be reported to a regulated trade repository. Aggregate data on open positions and trading volumes would need to be made available to the public, and data on an individual counterparty’s trades and positions would need to be available to federal regulators.

The changes are part of a push by the administration to close some of the gaps in the financial regulatory system that led to the financial crisis. Treasury Secretary Timothy Geithner (pictured) announced plans to do a better job of regulating the financial markets in congressional testimony in March.

He said in a letter to Senate Majority Leader Harry Reid, D-Nev., on Wednesday that the Treasury’s moves to regulate the derivatives market were part of that broader framework. “One essential element of reform is the establishment of a comprehensive regulatory framework for over-the-counter derivatives, which under current law are largely excluded or exempted from regulation,” he wrote.

The Treasury also proposes to impose margin requirements and risk controls to ensure that customized OTC derivatives are not used solely as a means to avoid using a clearing counterparty. All OTC derivatives dealers and all other firms that create large exposures to counterparties should be subject to supervision and regulation, said the Treasury, including conservative capital requirements, business conduct standards, reporting requirements, and initial margin requirements.

A financial services trade group expressed initial support for the administration’s proposals and acknowledged that the unregulated nature of derivatives has yielded some unintended consequences. “As we look to overhaul the current regulatory system, we must be thorough and transparent,” said Financial Services Roundtable president and CEO Steve Bartlett. “We commend the administration for recognizing the need to study the OTC derivatives market as part of the larger regulatory reform process.”


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