In just the past two weeks, two important committees in the U.S. House of Representatives – the Financial Services Committee and the Agriculture Committee – both passed historic legislation that, for the first time, introduces comprehensive regulation to the OTC derivatives marketplace.
Both of the committees’ bills include three important elements of regulatory reform: First, they require swap dealers and major swap participants to register and come under comprehensive regulation. This includes capital standards, margin requirements, business conduct standards and recordkeeping and reporting requirements. Second, the bills require that dealers and major swap participants bring their clearable swaps into central clearinghouses. Third, they require dealers and major swap participants to use transparent trading venues for their clearable swaps.
Swap dealers are those entities that make markets in derivative instruments. A major swap participant is generally someone other than a dealer who maintains a substantial net position in outstanding swaps other than swaps used for commercial hedging or whose positions create substantial exposure to its counterparties or the system. The proposed legislation requires both swap dealers and major swap participants to register and be subject to comprehensive regulations as these participants are the most relevant to the overall safety of the financial system.