House Reps Release Guidance for Derivatives Legislation

July 30, 2009 ( - House Financial Services Committee Chairman Barney Frank (D-Massachusetts) and House Agriculture Committee Chairman Collin C. Peterson (D-Minnesota) released a concept paper that will guide the two committees as they develop legislation to regulate derivatives.

According to the paper, the new legislation will require “robust” oversight of dealers and markets. The paper says primary oversight authority of the CDS (credit default swaps) clearinghouse, ICE Trust, will be shifted from the Federal Reserve to a market regulator after a period not longer than six months from the date of enactment.

The statutory and regulatory powers of the SEC and CFTC (commodity futures trading commission) should be harmonized with respect to the OTC (over-the-counter) derivative market including registration requirements for dealers, the lawmakers suggest.

Derivatives must be cleared by an approved clearinghouse, and regulators should have authority to prohibit or regulate transactions that are not traded on exchange or cleared.

Exchange trading and trading on electronic trading platforms will be strongly incentivized and encouraged except for when the appropriate regulator determines the product is not sufficiently standardized to be cleared or no qualified clearing mechanism exists, and when one party in the transaction does not qualify as a “major market participant” as determined by the appropriate regulator in consultation with the Financial Services Oversight Council.

The legislation should have the appropriate regulators develop margin and capital requirements that create a strong incentive for dealers and users of derivatives to trade them on an exchange or electronic trading platform or have them cleared whenever possible.

The paper also discusses limitations on speculation and enhanced oversight of speculative decisions.

Finally, the paper suggests ways the legislation will protect U.S. financial institutions from lesser regulatory standards in other countries.

The concept paper is here .