FACTBOX-Draft bill to tighten U.S. OTC derivatives rules

July 27 Mon Jul 27, 2009 4:19pm EDT

July 27 (Reuters) - Over-the-counter derivatives would move onto exchanges and "naked" credit default swaps could be banned under draft legislation to tighten U.S. control over derivatives trading.

According to a U.S. House committee document obtained by Reuters, the Securities and Exchange Commission would have oversight of security-based derivatives, while the Commodities Futures Trading Commission would supervise non-securities-based derivatives. Other points included the draft:

OVERSIGHT OF DEALERS, MARKETS

* Clearinghouses "will be robustly regulated." Oversight of ICE Trust, a clearinghouse for credit default swaps (CDS), would shift from the Federal Reserve to SEC.

* All OTC trades must be reported to a trade repository.

* Regulators must rule within 180 days of a request for approval of a clearinghouse, exchange or electronic trading platform.

MANDATORY CLEARING, EXCHANGE TRADING

* Derivatives must be traded on an exchange and go through clearing unless regulators decide the market for the derivative is too illiquid, the derivative is too customized for clearing or one party is an end-user who is not a "major market participant."

* Regulators should have authority to prohibit transactions that are not traded on exchange or cleared and the power to set standards for customized trades.

STRONGER CAPITAL, MARGIN REQUIREMENTS

* Regulators will develop margin and capital requirements that will encourage dealers to trade derivatives on exchanges and go through clearing.

* "Significantly higher" capital and margin charges will apply to customized transactions that are not traded on exchange or cleared; lower capital and margins would apply to derivatives that are traded on exchange and cleared.

2 ANTI-SPECULATION OPTIONS BEING CONSIDERED

* Ban "naked" credit default swaps, or

* Require reporting of all short interest in CDS contracts by OTC derivatives dealers, investor funds that exceed $100 million and "major market participants." Regulators would have power to impose position limits and "ban the purchase of credit protection using CDS by any nonreader who is not hedging a risk."

Naked CDS are those bought by parties who do not own the underlying asset, who do not run a risk that is protected by the CDS or is not a bona fide market maker.

HARMONIZE U.S., FOREIGN STANDARDS

* U.S. regulators to work with foreign regulators to harmonize regulation of OTC derivatives, including recognized international standards with respect to clearinghouses.

* Treasury Department will be authorized to restrict access to U.S. banking system for institutions from nations with lower capital standards or that promote "reckless" market activity.

SEC, CFTC jurisdiction

* A Financial Services Oversight Council will be created to determine which agency has jurisdiction over new products and to resolve disputes over interpretation of commodities and securities law.

* Agencies would have enforcement authority over products under their jurisdiction and joint enforcement power over any products subject to joint jurisdiction.

RELATED NEWS:

* Derivatives bill takes aim at speculation[ID:nN27527186]

* Frank sees finance reform by year-end [ID:nN27536847] (Reporting by Charles Abbott; editing by Andre Grenon)

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