Treasury, SEC and CFTC Jointly Propose Mandatory Central Clearing of Standardized Over-The-Counter Derivatives
Hedge Fund Law Report
On May 13, 2009, the Secretary of the Treasury, Timothy Geithner, along with the chairman of the Securities and Exchange Commission (SEC), Mary Schapiro, and the acting chairman of the Commodity Futures Trading Commission (CFTC), Michael Dunn, jointly announced a plan for reforming the regulation of over-the-counter (OTC) derivatives. Secretary Geithner elaborated on the plan in a letter dated the same day to House and Senate leaders. At the heart of the proposed reform is legislation that would require centralized clearing – through “central counterparties” or CCPs – of all standardized OTC derivatives. To prevent circumvention of the legislation, Geithner has cautioned that the customization of derivatives must not be “used solely as a means to avoid using a CCP.” Such practices might be headed off, Geithner suggested, by the creation of a legal presumption: the acceptance for clearing by one or more regulated CCPs of an OTC derivative would create a presumption that the accepted contract is standard, and thus within the mandatory clearing requirement. We provide a detailed discussion of the proposed reforms as well as the Authorizing the Regulation of Swaps Act, proposed by Senators Carl Levin (D-MI) and Susan Collins (R-ME) on May 4, 2009.