Financial Crisis News Center

House Leader Asks for SEC-CFTC Input as Derivatives Legislation Moves towards Passage

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and CCH Derivatives Regulation Law Reporter.

As the House anticipates floor debate on legislation regulating derivatives, Financial Services Committee Chair Barney Frank has asked the SEC and CFTC for input in crafting two important amendments to the legislation. In a letter to SEC Chair Mary Schapiro and CFTC Chair Gary Gensler, Mr. Frank said that he would clarify who can claim the exception from the clearing and trading requirement; and also place solely with the SEC and CFTC the decision on what swaps must be cleared. Specifically, the Frank Amendment would clarify the exception for end-users hedging legitimate business risks. The amendment is designed to make the exception tight enough to prevent speculators from masquerading as end users.

Private Advisor Registration Bill Approved with Bipartisan Support

By Gregg D. Killoren, J.D., CCH State Banking Law Reporter, Bank Digest and Individual Retirement Plans Guide.

The House Financial Services Committee has passed by a vote of 67 to 1 the Private Fund Investment Advisers Registration Act of 2009 (H.R. 3818), which would require managers of most hedge funds, private equity funds and venture capital funds in the U.S. to register with the Securities and Exchange Commission under the Investment Advisers Act of 1940. The existing exemption for investment advisers with fewer than 15 clients would be eliminated, and specific information reporting would be required for advisers to any “private fund.” A limited exemption would continue to apply to certain “foreign private advisers.” The existing threshold of $30 million of assets under management for mandatory SEC registration would continue to apply.

House Derivatives Legislation Represents Compromise with Moderate Democrats; Ag Committee Approves Legislation

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The OTC Derivatives Markets Act, HR 3795, that was favorably reported out of the House Financial Services Committee is a consensus-based piece of legislation representing significant input from moderate Democrats. Members of the New Democrat Coalition worked with Chairman Frank to bring this legislation to fruition. The legislation incorporates provisions from the Derivatives Trading Accountability and Disclosure Act HR 3300, which was backed by the New Democrat Coalition.

Financial Services Committee Approves Derivatives Regulation Bill

This story appeared in Bank Digest.

The House Financial Services Committee has approved a bill that would require the comprehensive regulation of the over-the-counter derivatives market. The bill would give rulemaking authority jointly to the Securities and Exchange Commission and the Commodities Futures Trading Commission, but authorize the Treasury Department to adopt rules if the two agencies could not agree on a joint approach. The bill includes five major provisions:

OTC Derivatives Bill Clears House Panel

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter, Oct 15, 2009.

The House Financial Services Committee voted 43 to 26 October 15 to pass a central tenet of the Obama administration’s financial regulatory reform agenda—legislation that would regulate the often complex and murky world of private over-the-counter derivatives trading. Many view the lack of proper regulation of the OTC derivatives market as a key factor behind last year’s financial crisis.

The bill will have to be merged with legislation from the House Agriculture Committee, which oversees the Commodities Futures Exchange Commission, before it goes to the full House for a vote.

Chairman Schapiro Remarks on Future of Financial Regulation

By Gregg D. Killoren, J.D., CCH State Banking Law Reporter, Bank Digest and Individual Retirement Plans Guide.

SEC Chairman Mary L. Schapiro, speaking at the University of Rochester's Presidential Symposium on the Future of Financial Regulation on Oct. 10, 2009, commented on gaps in financial regulation that need to be addressed, a constructive approach to systemic risk, and steps being taken by the SEC, apart from legislation, to achieve reform.

SEC Asks for Changes to House Draft Derivatives Legislation to Prevent Regulatory Arbitrage

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

While praising the House Financial Services Committee’s draft legislation to regulate the OTC derivatives markets, the SEC warned that the draft could present opportunities for significant regulatory arbitrage. In testimony before the committee, Henry T.C. Hu, Director of the Risk, Strategy and Financial Innovation Division said that the draft adopts a distinction that is not meaningful between derivatives referencing a single security or a narrow-based index of securities and derivatives referencing a broad-based index of securities. The SEC cautioned that a market participant could use a broad-based swap as part of a strategy to gain highly targeted exposure to a single company or a narrow group of companies.

Hedge Fund Industry Supports House Draft Legislation Regulating OTC Derivatives Markets

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The hedge fund industry has expressed qualified support for the House Financial Services Committee draft legislation regulating the OTC derivatives markets. In testimony before the committee, the Managed Funds Association expressed full support for the broad goals of the Over-the-Counter Derivatives Markets Act of 2009 to reduce systemic risk through the use of central clearing houses, the segregation of customer collateral by central clearing houses, and by providing customers with the option of having their collateral for customized swaps segregated. The MFA also endorsed provisions increasing transparency through trade and position reporting and providing the government with additional authority to avert and respond to economic or financial turmoil without disrupting ordinary market operations. The draft is being circulated by Barney Frank, the committee Chair. It is expected to be marked up in October.

Chairman Frank Circulates Draft Legislation Regulating OTC Derivatives

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

Rep. Barney Frank, Chair of the Financial Services Committee, has introduced draft legislation regulating the OTC derivatives markets by mandating exchange clearing and trading for the majority of derivatives products while preserving the over-the-counter market for specialized derivatives. The Chair’s draft is designed to implement the broad goals of the Obama Administration to increase transparency and eliminate systemic risk in the OTC derivatives markets while at the same time protecting end users seeking to hedge their risks and preventing much of the U.S. derivatives market from being forced overseas.

OTC Derivatives Discussion Draft Released

This story appeared in Bank Digest.

House Financial Services Committee Chairman Barney Frank, D-Mass., has circulated a discussion draft of legislation to regulate over-the counter (OTC) derivatives. In an Oct. 2, 2009, statement accompanying the draft’s release, Rep. Melissa Bean, D-Ill., Financial Services Committee member and co-chair of the New Democrat Coalition’s Financial Services Task Force noted, “Lacking and lagging regulation of OTC derivatives was a major contributing factor to last year’s crisis, including the highly-leveraged credit default swaps at AIG that prompted government intervention. I commend the hard work of the Chairman and the Committee on this issue. This bill moves us in the right direction by reducing risk to the economy with robust and dynamic oversight of major market participants, while preserving appropriate risk-management tools for end users.”

Statement at http://www.house.gov/apps/list/press/financialsvcs_dem/pressotc_100209.shtml

Discussion Draft at http://www.house.gov/apps/list/press/financialsvcs_dem/discussion_draft_otc.pdf