Federal regulators unveiled a plan Wednesday for a new regulatory framework that would force some over-the-counter derivatives to be traded on exchanges and subject some contracts to speculative position limits.
The plan, announced jointly by Treasury Secretary Timothy Geithner, Securities and Exchange Commission Chairman Mary Schapiro and Michael Dunn, the Commodity Futures Trading Commission's acting chairman, aims to shed more light on off-exchange trades, which are currently subject to very little federal regulation.
Under the plan, commodities regulators would be given the authority to set speculative position limits on exchange-traded and over-the-counter contracts if they have a significant impact on market prices.
The goal behind the plan is to prevent manipulation or excessive speculation, which some say can accelerate price movements.
The plan would also force all standardized over-the-counter contracts to be traded on regulated exchanges and cleared — a process which involves standing between buyers and sellers to guarantee that money changes hands.
Highly customized contracts that are still traded off-exchange would be subject to record keeping and reporting requirements.
In addition, derivatives dealers with large counterparty exposures would be subject to prudential supervision and regulatory oversight to ensure they do not pose systemic risks to the market.
This would entail more conservative capital requirements, business conduct standards, reporting requirements and initial margin requirements on both standardized and over-the-counter contracts.
The Commodity Futures Modernization Act of 2000 has allowed over-the-counter derivatives for the most part to escape federal regulation.
However, the financial crisis caused lawmakers and regulators to rethink that legislation after an exotic financial instrument known as a credit-default swap nearly caused the downfall of the insurance company American International Group Inc.
Despite their limited authority to oversee over-the-counter trading, securities and commodities regulators have argued for years about which agency should have the jurisdiction to regulate the contracts.
In unveiling their plan Wednesday, regulators opted not to dive into that debate, instead allowing each agency to operate within its current regulatory framework. Geithner said the idea behind the plan is to apply "a consistent set of standards."
Geithner, Schapiro and Dunn have all previously voiced their support for some new federal regulations of over-the-counter derivatives, echoing the calls for mandatory clearing and more oversight.
Wednesday's announcement, however, was the first time the Obama administration laid out more specific details on its plans for regulating over-the-counter derivatives.