July 27 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
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
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
* 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
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
* Agencies would have enforcement authority over products
under their jurisdiction and joint enforcement power over any
products subject to joint jurisdiction.
* 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)