Barney Frank to the Rescue!

The following is the text of the draft of the framework for the legislation that will attempt to regulate the "derivatives market" in the US of A. I present it as it is and add no commentary ... for the moment. When I figure out what it says, I let you know. Keep this in mind though, markets are living, breathing creatures that tend to move in relation to each other. When disparities exist, they will be taken advantage of. This is the essence of arbitrage and the reason why some people make millions while the rest of we mere mortals suffer in economic obscurity. Oh, by the way, if you think that any regulator, congressman or member of their staff, senior manager in a Wall Street firm or federal regulator has the ability to comprehend how a credit default swap actually works, then you are very sadly mistaken.

Never lose sight of the Golden Rule ... he who has the gold rules! especially in Washington DC.

July 30, 2009

Congressman Collin Peterson, Chairman, House Agriculture Committee
Congressman Barney Frank, Chairman, House Financial Services Committee

Description of Principles for OTC Derivatives Legislation

Robust Oversight of Dealers and Markets
Depending on the underlying asset on which a derivative is based, either the
SEC or the CFTC, or potentially both, will oversee the regulation of OTC derivative
dealers, exchanges and clearinghouses.

• Clearinghouse Regulation: Clearinghouses will be robustly regulated. Primary
oversight authority of the CDS clearinghouse, ICE Trust, will be shifted from the
Federal Reserve to a market regulator after a period not longer than six months
from the date of enactment.
• Trade Reporting: All OTC derivative trades must be reported to a qualified trade
repository.
• Regulatory Approval: Requests for approval as a clearinghouse, exchange or
electronic trading platform must be acted on by the relative agency within 180
days.
• Regulatory Harmonization: The statutory and regulatory powers of the SEC and
CFTC shall be harmonized with respect to the OTC derivative market including
registration requirements for dealers.

Mandatory Clearing of OTC Derivatives
Derivatives must be cleared by an approved clearinghouse. Exchange trading and trading
on electronic trading platforms will be strongly incentivized and encouraged.
Exceptions:
• Appropriate regulator determines the product is not sufficiently standardized
to be cleared or no qualified clearing mechanism exists.
• One party in the transaction does not qualify as a “major market participant”
as determined by the appropriate regulator in consultation with the Financial
Services Oversight Council.

Regulators should have:
o Authority to prohibit or regulate transactions that are not traded on
exchange or cleared.

Strengthening Capital and Margin Requirements
Appropriate regulators will develop margin and capital requirements that create a strong
incentive for dealers and users of derivatives to trade them on an exchange or electronic
trading platform or have them cleared whenever possible.

• Significantly higher capital and margin charges will apply to non-standardized
transactions that are not exchange-traded or centrally cleared.
• Regulators can authorize use of non-cash collateral to satisfy margin
requirements.

Particular Attention to Speculation
At least two options will be considered:

1. Limitation on Speculation
Prohibition on any purchase of credit protection using a CDS contracts unless:
• The party owns the referenced security or (one or more) of the
securities in an index of securities.
• The party has a bona fide economic interest that will be protected by
the contract.
• The party is a bona fide market maker.
• Regulators will have authority to monitor market activity and impose
position limit where necessary.

2. Enhanced Oversight of Speculative Positions
Require confidential reporting to the appropriate regulator of all short interest in
CDS contracts by:
• OTC derivatives dealers;
• Investment advisers that manages in excess of $100 million;
• Other entities that are deemed “major market participants”.

In order to prevent abuse, the appropriate regulator has authority to:
• Impose position limits on market participants;
• Ban the purchase of credit protection using CDS by any non-dealer
that is not hedging a risk.

Protect U.S. Financial Institutions from Lesser Regulatory Standards in Other
Countries
• U.S. regulators will coordinate with foreign regulators on harmonizing OTC
derivative market regulation including recognized international standards with
respect to clearinghouses.

• The Treasury Department will be authorized to restrict access to the U.S. banking
system for institutions of any jurisdiction Treasury finds permits capital-related
standards that are lower than the United States or that promote reckless market
activity.

Role of Financial Services Oversight Council
• Resolve disputes between the SEC and CFTC over authority over new products
within 180 days.
• Resolve disputes between the SEC and CFTC over joint regulation of derivative
products within 180 days.

Enforcement
• Agencies shall have enforcement authority over products under their jurisdiction.
• Agencies shall hold enforcement authority jointly for any products subject to joint
jurisdiction.