Treasury Secretary Geithner Seeks Restraints on OTC Derivatives Market
May 18, 2009
In a letter dated May 13, 2009, sent to members of Congress, Treasury Secretary Timothy Geithner stated that an essential element of regulatory reform is the establishment of a comprehensive regulatory framework for over-the-counter (OTC) derivatives. He stated that government regulation should be aimed at (1) preventing activities in the OTC markets from posing a risk to the financial system; (2) promoting efficiency and transparency in the OTC markets; (3) preventing fraud, market manipulation and other abuses; and (4) ensuring OTC derivatives are not marketed inappropriately to unsophisticated parties. Treasury Secretary Geithner outlined amendments to the Commodity Exchange Act (CEA), the securities laws and other relevant laws. The amendments would:
- require clearing of all standardized OTC derivatives through regulated central counterparties (CCPs); CCPs would need to implement robust margin requirements and other necessary risk controls and ensure that customized OTC derivatives are not used solely as a means to avoid using a CCP
- subject OTC derivatives dealers, and other firms whose activities in those markets create large exposures to counterparties, to robust and appropriate supervision and regulation
- increase transparency in the OTC derivatives markets by amending the CEA and the securities laws to authorize the Commodity Futures Trading Commission (CFTC) and the SEC to impose recordkeeping and reporting requirements on all OTC derivatives
- improve market efficiency and price transparency in derivatives markets by requiring the clearing of standardized contracts through regulated CCPs, moving the standardized part of these markets onto regulated exchanges and requiring the development of a system for prompt dissemination of prices and other information, and the timely reporting of trades
- authorize the CFTC to set position limits on OTC derivatives or affect a significant price discovery function with respect to regulated markets
http://online.wsj.com/public/resources/documents/OTCletter20090513.pdf
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