Obama administration sends proposed derivatives reforms to Congress

The US Department of the Treasury sent legislative language to Congress on Aug. 11 which would institute regulation of all over-the-counter derivatives.

The proposal targets credit default swaps and other OTC derivatives whose use has grown dramatically but which have largely gone unregulated. Several federal lawmakers have suggested that speculators used these unregulated instruments to take major commodity positions and push crude oil prices to record peaks in 2008’s first half. Independent oil and gas producers and others who take commodity positions as price hedges have warned that too much regulation could harm their operations.

“The legislation will provide for regulation and transparency for all OTC derivative transactions; strong 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,” the Treasury Department said in its announcement.

The proposal generally followed ideas US Treasury Secretary Timothy F. Geithner described when he testified on July 10 before a joint hearing of two US House committees. Rep. Collin E. Peterson (D-Minn.), who chairs the Agriculture Committee, and Rep. Barney Frank (D-Mass.), who chairs the Financial Services Committee, jointly outlined their proposal to regulate OTC derivatives on July 31.

“Treasury’s legislative proposal is a very important step toward much-needed reform to protect the American people by lowering risk, promoting transparency and protecting market integrity,” US Commodity Futures Trading Commission Chairman Gary G. Gensler said on Aug. 11.

“I believe that all over-the-counter derivatives and dealers should be brought under comprehensive regulation. I look forward to working with Congress to make sure that the law covers the entire marketplace without exception,” he said.

Contact Nick Snow at nicks@pennwell.com

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