The U.S. administration took another step toward a new regulatory regime for over-the-counter derivatives, delivering final legislative language for its planned reforms to Congress on Tuesday.

The legislation will provide for regulation and transparency for all OTC derivative transactions; prudential and business conduct regulation of all OTC derivative dealers and other major participants in the OTC derivative markets; and improved regulatory and enforcement tools to prevent manipulation, fraud, and other abuses in these markets.

Among other things, the legislation will require standardized OTC derivatives to be centrally cleared by a derivatives clearing organization, regulated by the Commodity Futures Trading Commission, or a securities clearing agency regulated by the Securities and Exchange Commission; and, to improve transparency and price discovery, standardized OTC derivatives will be required to be traded on a regulated exchange or alternative swap execution facility. Non-standardized derivatives will face higher capital requirements and higher margin requirements, to encourage migration to standardized derivatives.

It will also require that regulators have confidential access to OTC derivative transactions and related open positions of individual market participants; that the public have access to aggregated data on open positions and trading volumes; and the legislation will require the regulation of any firm that deals in OTC derivatives and any other firm that takes large positions in OTC derivatives.

The regulators will be required to issue and enforce strong business conduct, reporting, and recordkeeping (including audit trail) rules for all OTC derivative dealers and major market participants. The legislation also beefs up their authority to deter market manipulation, fraud, insider trading, and other abuses in the OTC derivative markets. The CFTC and SEC will be given the authority to set position limits and large trader reporting requirements.

“Today’s delivery marks an important new milestone, as the Administration has now delivered a comprehensive package of financial regulatory reform legislation to Capitol Hill,” noted the US Treasury. “The administration looks forward to working with Congress to pass a comprehensive regulatory reform bill by the end of the year.”

IE