The specter of increased bank regulation has again reared its head: Newly elected Commodity Futures Trading Commission Chairwoman Mary Shapiro said the commission would reconsider its exemption of OTC derivatives dealers from regulation.
Last year, the CFTC exempted over-the-counter swaps from regulation, prompting critics to say the commission was abdicating its duty. But Monday, the commission voted to solicit public comments on a proposal to cut back the list of swaps dealers exempted lrom its scrutiny. The CFTC also proposed an antifraud law that would allow it to bring fraud charges against swaps dealers.
Ms. Shapiro said recently that derivatives-related losses incurred by municipalities, colleges, and pension funds had aroused CFTC interest. She said the losses had called into question the suitability of swaps for some investors.
Swaps are agreements between two parties to exchange cash flaws at a future date according to a prearranged formula. Exchange-traded derivatives are standardized contracts that involve less credit risk because the exchange acts as counterparty. OTC derivatives are customized to meet customers' needs, increasing the possibility of counterparty default.
Bankers argue that OTC swaps should remain outside the CFTCs purview because they are not offered to the general public and are not readily tradable. The commission's proposal will be out for public comment for 45 days.
