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August 2009

Over-The-Counter Derivatives Markets Act to Provide Comprehensive Regulation of OTC Derivatives

The US Department of Treasury recently delivered draft legislation to Congress titled "Over-the-Counter Derivatives Markets Act of 2009," that, if enacted, will provide comprehensive regulation of over-the-counter (OTC) derivatives. The most notable features of the proposed legislation are the requirement for mandatory clearing of standardized OTC derivatives, stronger capital and margin requirements for dealers and major swap participants, new disclosure obligations and certain limitations on participating in different types of derivatives. The proposed legislation calls for the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to jointly adopt further rules and regulations under the legislation within 180 days of its effective date.

The legislation would require "standardized" OTC derivatives to be cleared centrally by a derivatives clearing organization and to be traded on an exchange or alternative swap execution facility, all under the regulation of the CFTC or SEC. By imposing higher capital requirements and higher margin requirements for non- standardized derivatives, the legislation intends to encourage greater use of standardized derivatives, which would facilitate migration of OTC derivatives onto these central clearinghouses and exchanges. In addition, the legislation would, for the first time, impose federal supervision and regulation of all firms dealing in OTC derivatives and all firms that take large positions in OTC derivatives, with dealers and major market participants that are banks being regulated by the federal banking agencies and those that are not banks being regulated by the CFTC or SEC.

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