Taking its first step in implementing the Obama Administration’s financial services regulatory overhaul, Treasury Secretary Timothy Geithner announced May 13 a comprehensive regulatory framework for the over-the-counter derivatives market.
In laying out the proposal, Geithner said that as “the AIG situation has made clear, massive risks in derivatives markets have gone undetected by both regulators and market participants. But even if those risks had been better known, regulators lacked the proper authorities to mount an effective policy response.” Moving forward, Geithner said the Administration will work with Congress to implement the regulatory plan.
SEC Chairman Mary Schapiro, who accompanied Geithner during the announcement, said that “There is widespread agreement that OTC derivatives, particularly credit default swaps, may have contributed greatly to the financial mess we’re cleaning up today.” Unfortunately, she continued “the lack of clear regulatory authority over this vast market has hindered the ability of regulators to fully understand how this market functions or to ensure that basic standards of fairness are followed.”
Today, Schapiro said, “current federal statutes significantly restrict the ability of financial regulators to obtain reporting or record-keeping in the OTC derivatives market. Yet these are the very types of tools that any regulator would need to identify suspicious trading patterns or better understand systemic risks.” In addition, she said, “central clearing for credit default swaps and other OTC derivatives would bring to this market much-needed transparency.”
The Administration would amend The Commodity Exchange Act (CEA) to give both the SEC and the Commodities Futures Trading Commission (CFTC) regulatory powers over the OTC market.
Treasury’s regulatory reform proposal follows:
Preventing Activities Within The OTC Markets From Posing Risk To The Financial System
Regulators must have the following authority to ensure that participants do not engage in practices that put the financial system at risk: