24 June 2009

SEC and CFTC Draw Derivative Regulation Lines

At a congressional hearing [Monday], Securities and Exchange Commission Chairman Mary L. Schapiro proposed that her agency oversee derivatives linked to stocks, bonds and securities and that the Commodity Futures Trading Commission oversee all other derivatives. CFTC Chairman Gary Gensler, sitting beside her, didn't offer his own proposal, but a spokesman said Gensler agrees with Schapiro, except on one outstanding issue. . . .

The accord between the SEC and CFTC awaits action by Congress, which a decade ago exempted derivatives from regulation. In a plan for retooling financial regulation announced last week, the Obama administration proposed new rules and heightened oversight for derivatives and the firms that trade in them. But the administration left the division of labor up to the SEC and CFTC, both independent agencies. . . .

Still being negotiated between the SEC and CFTC is oversight of derivatives linked to indexes -- for instance speculating on whether the Dow Jones industrial average will rise or fall.

From here.

The total nominal value of the derivatives market (a less than idea number because many derivatives, like credit default swaps, are essentially guarantees whose real value isn't reflected in their face value and more than total life insurance face value outstanding reflects the likely annual payouts of life insurance; in contrast, aggregate market capitalization has a far more direct relationship to the amount of bonds and stocks outstanding) is estimated to be about $400 trillion.

More transparency for "standard" form derivative would also be mandated under Obama's financial regulation package, but it appears that customized non-publicly offered derviative deals would continue to be largely exempt from regulation.

No comments: