Regulation

Overview
Key Bills
Regulatory Bodies

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Derivatives Reform Overview
Legislative bodies in the U.S. and Europe are moving to increase regulation of the over-the-counter (OTC) derivatives market.  In the US, President Barack Obama has signed into law the Restoring American Financial Stability Act of 2010. Regulatory bodies will now begin drafting rules based on the framework in the bill.  In Europe, The Committee of European Securities Regulators (CESR) has issued two consultation papers designed to define certain terms in the new OTC derivatives landscape and asking for comments. The deadline for comment on the two reports, titled “Standardization and Exchange Trading of OTC Derivatives” and “Transaction Reporting on OTC Derivatives and Extension of the Scope of Transaction Reporting Obligations”, is August 16.
 

Key Bills
In the U.S., the primary piece of financial reform is: 
  • Has been signed into law by President Obama on July 21, 2010
  • Combines the bills passed by the House of Representatives and the Senate.
  • Contains a version of the Lincoln Amendment that requires banks to spin off some of their OTC derivatives operations.
  • Would require most derivatives to be traded on swap execution facilities (SEFs) or exchanges and be cleared through clearinghouses.
  • Would mandate banks getting federal aid to spin off their OTC derivatives businesses into affiliates.

Regulatory Bodies
Although many organizations, including political bodies as well as financial institutions, are involved in shaping the reforms to come, the primary players include the following:
 
U.S.
The Securities and Exchange Commission (SEC)
  • Regulates the securities industry (stocks, bonds and security-based derivatives) and enforces its laws.
  • Oversees the key participants in the securities world, including exchanges, brokers, dealers, investment advisors and mutual funds.
  • Primary overseer and regulator of the U.S. securities markets, whose chairman serves as a member of the President’s Working Group on Financial Markets.
The Commodity Futures Trading Commission (CFTC)
  • Responsible for regulating the commodity futures and options markets in the U.S. This includes ensuring transparency in the markets and overseeing trade execution and clearing facilities.
The House Committee on Financial Services
  • Oversees the entire financial services industry, including securities.
  • Oversees the Fed and the treasury.
  • Not directly involved in derivatives regulation.
  • Regulates the bank reserve ratio, which affects the amount banks have to invest in securities as a whole.
 
UK
The Financial Services Authority
  • National regulator of the derivatives market, subject to EU regulations.
 
Europe
The European Commission
  • Each country has one national financial regulatory agency that regulates the local market.
  • European Union regulations override national regulations – this applies to any implemented EU derivatives legislation.

Regulatory Timeline