Key House Democrats today announced a general agreement on draft legislation to encourage derivatives dealers and traders “to trade them on an exchange or electronic trading platform or have them cleared whenever possible,” according to a news release issued by Rep. Barney Frank, D-Mass., and Rep. Collin Peterson, D-Minn.
The legislation, to be written jointly by the House Financial Services and Agriculture committees, would use margin and capital requirements to push derivatives users to clear trades, and also would consider at least two ways to limit speculation, according to the news release.
It could prohibit credit-default swap contracts in many cases unless the purchaser owns the underlying security being protected or has an economic interest that will be protected by the contract. It also could require the disclosure of short interest in CDS contracts by over-the-counter derivatives dealers and investment advisers that manage more than $100 million in assets.
The proposed bill would authorize federal regulators to set position limits on market participants and ban purchase of credit protection using a CDS “by any non-dealer that is not hedging a risk,” the news release said.
“The fundamental purpose here is to improve the regulation of derivatives so that they continue to perform their important market function but are less likely to contribute to a kind of irresponsibility that can cause a crisis,” Mr. Frank, chairman of the House Financial Services Committee, said in the release.
“I think we have come up with a responsible approach that bridges the differences between those members who want to completely eliminate the over-the-counter market and those who think that just greater transparency is all that is needed,” added Mr. Peterson, who chairs the House Agriculture Committee, in the release. “Neither of those approaches is a real solution; what we are putting forth is.”