US legislators outline derivatives proposals

Two committee chairmen from the US House of Representatives have published a concept paper on regulation of over-the-counter (OTC) derivatives designed to guide any future legislation.

Congressmen Collin Peterson, chairman of the House Agriculture Committee, and Barney Frank, chairman of the House Financial Services Committee, released the paper yesterday. They said it would guide the two committees in the development of legislation to regulate derivatives when Congress returns from the summer recess in September.

The paper said the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC) should oversee regulation of OTC derivative dealers, exchanges and clearinghouses, depending on the underlying asset on which a derivative is based.

It also called for mandatory clearing of all OTC derivatives through an approved clearinghouse. Trading on exchanges and electronic platforms should be "strongly incentivised and encouraged" through higher margins and capital requirements for non-exchange-traded transactions or those that are not cleared centrally.

Non-standardised products (as determined by the appropriate regulator) and transactions where one party does not qualify as a major market participant (as determined by the appropriate regulator and the Financial Oversight Council) would be exempt from mandatory clearing under the proposals.

US regulators should also work with foreign regulators to harmonize OTC regulations, according to Peterson and Frank.

Chairman Peterson said: "I think we have come up with a responsible approach that bridges the differences between those members who want to completely eliminate the over-the-counter market and those who think that just greater transparency is all that is needed. Neither of those approaches is a real solution; what we are putting forth is."

Chairman Frank said: "Nobody here wants to ban [derivatives] or even severely diminish them as an economic instrument. The Committee on Agriculture represents a lot of end users for whom they are very important. The Committee on Financial Services deals with a lot of the financial institutions. They have an interest that has to be blended."