WASHINGTON (Reuters) - The Obama administration on Thursday will propose big changes to the way the U.S. financial system is regulated with the intention to clamp down broadly on hedge funds, private equity firms, derivatives and credit default swap markets, administration officials said.
Here are some of the administration’s key initiatives, according to the officials:
The administration’s regulatory reform would cover four areas: systemic risk; consumer and investor protection; closing regulatory gaps; and international coordination.
The administration would work with Congress to classify large financial firms, deposit-taking or not, that would have to meet higher capital and liquidity standards due to their size and their importance in the overall economy.
The administration and Congress would work together to set oversight standards for these firms, and to assign the responsibility for regulating them, officials said.
When deciding which firms to subject to the higher standards, the administration wants to look at the financial system’s interdependence with the firm; its size, leverage and reliance on short-term funding; and its role as a source of credit in the economy.
Supervisors of these firms would set counterparty, and credit risk management requirements that are higher than for other financial firms.
The administration will urge revising accounting standards for loan loss reserves to account for losses throughout the business cycle. And it will recommend that fair-value accounting rules be reviewed to reduce their pro-cyclical tendencies, while still providing transparency.
Clarity and more oversight will be recommended by the administration for overnight and short term lending markets, such as those for tri-party repurchase agreements, and over-the-counter derivatives, officials said.
The administration will recommend that all advisers to hedge funds, private equity funds and venture capital funds, whose assets under management exceed a not-yet-determined amount, must register with the U.S. Securities and Exchange Commission, the officials said.
The recommendation will call for funds advised by an SEC-registered investment adviser to heed investor and counterparty disclosure requirements. Reporting would involve information needed to assess whether a fund is so large or highly leveraged that it poses a threat to financial stability.
The SEC would share the reports it gets from funds with the systemic risk regulator, which would decide whether any hedge fund poses a systemic threat and should be subjected to the higher standards for systemically important firms.
For the first time, under the proposals, the government would regulate markets for credit default swaps and over-the-counter derivatives, officials said.
All dealers in OTC derivative markets would be subjected to oversight as systemically important firms. All standard OTC derivative contracts would have to be cleared through central counterparties, themselves under supervision and oversight.
All non-standardized derivatives contracts would have to report to trade repositories and be subject to record-keeping standards and other standard practice requirements.
Central counter-parties and trade repositories would have to disclose aggregate data on trading volumes and positions and make individual counterparty trade and position data available on a confidential basis to appropriate federal regulators.
Finally, the administration will urge the SEC to strengthen regulations around these funds, the officials said.
Reporting by Kevin Drawbaugh and David Lawder; Editing by Jan Dahinten