On August 11, the Treasury Department released the Over-the-Counter Derivatives Markets Act of 2009 (“OCDMA”), its legislative proposal to regulate the over-the-counter (OTC) derivatives industry. The proposed legislation provides an approach to comprehensively regulating OTC derivative transactions and the entities that enter into OTC derivatives transactions. Through its proposal, the Treasury Department is recommending the repeal of many provisions of the Commodity Futures Modernization Act (“CFMA”), which was adopted in 2000.

Background

On August 11, the Treasury Department released the Over-the-Counter Derivatives Markets Act of 2009 (“OCDMA”), its legislative proposal to regulate the over-the-counter (“OTC”) derivatives industry.[1] The proposed legislation closely follows the proposals offered by Treasury Secretary Timothy Geithner [2] and Commodity Futures Trading Commission (“CFTC”) Chairman Gary Gensler [3] earlier this year. Treasury’s proposed legislation shares similar themes with the joint principles [4] offered by House Agriculture Committee Chairman Colin Peterson and House Financial Services Committee Chairman Barney Frank, whose Committees have jurisdiction over the federal banking regulators, the Securities and Exchange Commission (“SEC”) and the CFTC. Given the full legislative agenda of the Senate in the fall, it is expected that the House of Representatives will move first on drafting OTC derivatives legislation, likely using the Administration legislative proposal as a template for its own legislation. It remains unclear if Congress will pass OTC derivatives legislation in the remaining Congressional legislative session.

However, should the climate change/energy legislation and healthcare reform efforts stall, lawmakers will turn their attention to financial reform, including regulation of OTC derivatives.

Framework of the Legislation

The OCDMA effectively divides regulatory authority over OTC derivatives between the CFTC and the SEC, reflecting the current division of jurisdiction between the agencies in the futures markets. Specifically, under the OCDMA, security-based swaps and credit derivatives based on a single security or issuer, or a narrow based group of securities, will be regulated by the SEC and swaps and credit derivatives based on broad-based indices will be regulated by the CFTC. The same division will also apply to swaps based on corporate debt and event-based contracts. All other OTC products, including interest rate, currency and commodity swaps, will fall under the control of the CFTC. However, federal banking regulators will maintain their jurisdiction over identified banking products (as defined by the Commodity Futures Modernization Act of 2000), unless the appropriate federal banking agency, in consultation with the CFTC and/or SEC, determines that the banking product has been structured in such a way that it performs the same function as a swap or was structured in a way to avoid regulation. If the regulators make that determination, the banking product will be regulated by the CFTC or the SEC.

The bill sets an aggressive timeline – 6 months to 1 year, for the agencies to implement the required rulemakings. Swap transactions entered into before the enactment of OCDMA must be reported to a regulated repository within 6 months of the effective date of the regulation.

(more…)