The Obama administration plans to regulate sophisticated financial instruments linked to last year's market turmoil by requiring standardized over-the-counter derivatives to be cleared through central clearinghouses, two congressional staff workers told Reuters on Wednesday.
Announcement of the plan was to be made by Treasury Secretary Timothy Geithner, Securities and Exchange Commission Chairman Mary Schapiro, and Mike Dunn, acting chairman of the Commodity Futures Trading Commission, at 4 p.m.
Under current law, over-the-counter (OTC) derivatives are largely excluded or exempted from regulation.
The administration's plan would ask Congress to amend securities and futures laws to require greater reporting of trading in non-standard OTC derivatives, said one of the aides.
Besides requiring clearing of standardized OTC derivatives, the plan would let CFTC set limits on OTC derivatives that affect prices on public exchanges, said the aide. Derivatives cleared by a clearinghouse would be viewed as standardized instruments, said the aide.
The other aide said the Obama administration appeared ready to require clearing of standardized contracts.
Clearinghouses are widely used to bring liquidity into a market and bring trading into the open. Because members of a clearinghouse are obligated to absorb losses, they are expected to carefully gauge risk and set margin requirements on financial instruments. Clearing also shows how much exposure is held by a market participant.
Following last year's market turmoil, U.S. regulators urged creation of clearinghouses to stabilize the market in credit default swamps, valued in trillions of dollars.
Lawmakers disagree over which federal agency should oversee clearing of OTC derivatives.
Earlier on Wednesday, CFTC commissioner Bart Chilton said clearing should be mandatory for OTC derivatives that serve as price discovery contracts and regulators should be able to impose prudential requirements, such as increased capital, as necessary.
I believe that President Obama's team is headed in the right direction on these issues, and I fully support increased oversight of OTC markets, and the concomitant regulatory reforms required in both the commodity and securities laws to ensure that consumers and markets are protected, said Chilton, a Democrat.
The 2008 law that created the Treasury Department's Troubled Asset Relief Program also directed the department to submit a report to Congress on regulation of the OTC swaps market, the heart of the so-called shadow banking system.
The department was required to report on ways to improve the over-the-counter swaps market and government-sponsored enterprises and to say whether any participants in the financial markets that are currently outside the regulatory system should become subject to the regulatory system; and enhancement of the clearing and settlement of over-the-counter swaps.
(Reporting by Charles Abbott and Kevin Drawbaugh; editing by Tim Dobbyn)