Geithner Wants Mandated Clearing and Reporting of OTC Derivatives
March 26, 2009
The U.S. government will seek to require that all standardized over-the-counter derivatives are cleared through central counterparties, Treasury Secretary Timothy Geithner told Congress today. Treasury also wants all bespoke contracts reported to trade data repositories.
Geithner, who was unveiling the administration’s regulatory package before the House Financial Services Committee, said the reform would bring settlement systems into the regulatory fold to a greater degree. The proposal also requires hedge funds and private equity and venture capital firms to register with the Securities and Exchange Commission if their assets under management exceed a yet-to-be-determined amount.
In a separate hearing with the Senate Banking Committee, SEC commissioner Mary Schapiro asked for legislation that would enable her agency to oversee trading of credit default swaps (CDS). Shapiro also appealed to Congress to boost the commission’s powers in monitoring the municipal bond market.
The administration’s plan would require central clearinghouses and data repositories to transfer individual trade and position data on OTC derivatives confidentially to multiple federal regulators. Aggregate data on trading volumes and positions would be made available to the public.
On March 24, Geithner told the House Financial Services Committee that Congress should work with Treasury through “law and regulation” to bring CDS and other derivatives markets “into an oversight framework that provides better protection for the financial system.” That includes moving plain vanilla contracts onto central clearinghouses and exchanges, he said, but will also call for “much better reporting and disclosure requirements.” Geithner called it “critically important” that firms are made to hold sufficient capital reserves to ensure they survive bad derivative bets.
While Geithner said today that he encourages “further use of exchange-traded instruments,” he noted that the plan “would still preserve the capacity for the more specialized tailored products, which our system relies on to manage risk effectively. We want to have protections for those too.”
Schapiro called on Congress to pass legislation that would “require registration of investment advisers that advise hedge funds, and likely of the hedge funds themselves, legislation to break down statutory barriers between broker-dealers and investment advisors, and to fill other gaps in regulatory oversight, including those related to credit default swaps and municipal securities.”
In written testimony, Geithner recommended the establishment of “a single entity” with “broad and clear authority over systemically important payment and settlement systems and activities. Where such systems or their participants are already federally regulated, the authority of those federal regulators should be preserved and the single entity should consult and coordinate with those regulators.”
