House bill calls for OTC trading restrictions

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Rep. Collin Peterson, D-Minn. today introduced a bill to reform derivatives markets that would include rules to mandate central clearing of over-the-counter contracts.

The bill would separate the oversight of the OTC market between the Commodity Futures Trading Commission and the Securities and Exchange Commission, but seeks to “deny the Federal Reserve the authority to establish regulations or rules with regard to clearing OTC transactions.”

Regulatory oversight of financial OTC derivatives has been the subject of a debate, as the contracts can be regarded as futures or securities, based on interpretation.

All over-the-counter transactions would be settled and cleared through a “CFTC-regulated derivative clearing organization” under H.R. 977 legislation, the Derivatives Markets Transparency and Accountability Act of 2009. OTC financial contracts could be settled and cleared through an SEC-regulated clearing agency or, “as an alternative to clearing, OTC transactions may be reported to the CFTC,” according to the bill.

Industry participants have cautioned that mandatory clearing of financial OTC derivatives contracts would cripple a market, with a notional value of $596 trillion, designed to be tailored to individual needs.

The bill would even grant “the CFTC the authority to suspend credit default swap trading, with the concurrence of the president.”