To address information deficits in the OTC derivatives markets, both for energy derivatives as well as non-energy derivatives, the Administration has proposed – and we support – the following priorities:
First, all standardized OTC derivative transactions should be moved onto regulated transparent exchanges or trade execution facilities. This is the best way to address information deficits for market participants. Customized transactions that are so tailored that they are not able to be cleared or listed on an exchange should be allowed, but dealers should be subject to comprehensive regulation. Such transparency greatly improves the functioning of the existing securities and futures markets. We should shine the same light on the OTC derivatives markets.
Increasing transparency – including a timely consolidated reporting system – for standardized derivatives should enable both large and small end-users to obtain better pricing on standardized and customized products. Corporate treasurers across America would find access to trading screens would greatly benefit their ability to determine the best price and hedge their risk. A utility company, for example, could better decide whether or not to purchase natural gas derivative contracts based upon the reported pricing from exchanges. As customized products often are priced in relation to standardized products, mandated trading through transparent trading venues should benefit all end-users, whether trading with standardized or customized swaps. Just as transactions involving end-users are not exempt from trading on existing stock or futures exchanges, all standard contracts should be brought to transparent trade execution facilities.
Second, all transactions that do not occur on trading platforms should be reported to a trade repository that makes the data available to regulators. This will complement regulators’ ability to obtain transaction data on trades conducted through a transparent trading venue. U.S. regulators and foreign regulators should both have unfettered access to see all transactions, regardless of whether the physical locations of the trade repositories and clearinghouses are in the United States or elsewhere.
Third, data on OTC derivatives transactions should be aggregated and made available to the public. The CFTC currently collects and aggregates large trader position data and releases it to the public. We should apply the same transparency standards to OTC derivatives. This will promote market integrity and protect the American public.
Fourth, stringent recordkeeping and reporting requirements should be established for swap dealers and major swap participants and vigorously enforced. This should include an audit trail so that regulators can guard against fraud, manipulation and other abuses. Regulators also should have the authority to set aggregate position limits in the OTC markets.