WASHINGTON -- Legislation to regulate derivatives affiliates of broker-dealers and insurance companies was introduced yesterday by Senate Banking Committee chairman Donald Riegle, D-Mich.
Riegle's bill is similar to a measure offered last-Wednesday in the House by Rep. Edward Markey, D-Mass. although it is broader because it includes provisions to limit trading in derivatives by banks and other insured depository institutions.
Currently, the derivatives affiliates of six broker-dealers and three insurance companies are not subject to SEC oversight, including a number that handle municipal derivative transactions.
Riegle yesterday said his bill would "close a significant gap" by placing major dealers under SEC regulation. Under the measure, a major dealer is defined as one whose ability to meet obligations as they come due "is potentially significant to the stability of financial markets," according to an outline of the legislation released yesterday by the Banking Committee.
Riegle's legislation adds an influential Senate voice to the drive for stricter federal controls on derivatives. So far, most of the talk about legislation has been in the House Banking Committee, chaired by Rep. Henry Gonzalez, D-Tex. and in the Energy and Commerce telecommunications and finance subcommittee, chaired by Markey. Gonzalez and Jim Leach, D-Iowa, the banking panel's ranking minority member, have offered a bill aimed at setting standards for banks' derivatives activities.
SEC officials have resisted appeals for legislation, saying they have the tools to do the job. In addition, SEC officials are negotiating privately with dealers and the Securities Industries Association in an attempt to come up with informal standards on their own.
Riegle's bill would require both banks and major dealers to disclose how much they hold in various derivatives, as well as revenues, gains and losses, and other financial information. To the extent possible, such information would be provided separately for exchange-traded and over-the-counter instruments.
The legislation would further require institutions to develop management plans explaining the purpose of their holdings in derivatives, how those holdings are consistent with a risk management plan, and how the derivatives were obtained.
Besides the SEC, the Federal Reserve and other federal banking agencies would be directed to produce a joint set of minimum capital standards, along with accounting and other regulatory principles. The agencies would be directed to coordinate with foreign central banks and regulators -- a provision that is also contained in the Gonzalez-Leach bill for banking affiliates.
In addition, federal agencies would have 18 months after enactment of the legislation to produce regulations aimed at reducing the systemic risk of a major meltdown in financial markets -- a risk cited in a report issued this year by the General Accounting Office.
The six broker-dealers with derivatives affiliates are: Goldman, Sachs & Co.; Salomon Inc.; Merrill Lynch & Co.; Morgan Stanley & Co.; Lehman Brothers; and CS First Boston.
The insurance companies are: American International Group Inc., the Prudential Insurance Company of America, and General Re Corp.
