NEW YORK Contracts in the $450 trillion derivatives markets would need to be cleared through central counterparties unless they are exempted by regulators, under a financial regulation reform bill introduced by U.S. Senate Banking Committee Chairman Christopher Dodd on Tuesday.
The bill here calls for all swaps to be centrally cleared, but said regulators may exempt the contracts if no central clearinghouse accepts the swaps, or of if one of the counterparties to the trade is not a dealer.
Details on what constitutes a swap and a major swap participant, both of which would fall under the regulation of the Commodity Futures Trading Commission and Securities and Exchange Commission, are included in the bill.
The CFTC and SEC would adopt rules further defining terms within 180 days of the act being implemented and the regulators would have the right to prescribe definitions for swaps to include transactions that have been structured to avoid the classification, under the bill.
Regulators are pushing for the majority of derivatives to be cleared through central counterparties, which stand between trade counterparties and assume the risks of the trade, to reduce systemic risks posed by the interconnectiveness of the contracts.
Derivatives can be used to hedge against or bet on the changes in value of the underlying assets such as stocks, bonds, commodities.
(Reporting by Karen Brettell and Kevin Drawbaugh; Editing by Leslie Adler)