Proposed Reform of the OTC Derivatives Market: Turning “Weapons” into Plowshares?

Abstract

The OTC derivatives market is increasingly the policy focus of lawmakers in the United States, Europe and elsewhere. The objective and details of reaching the goals of transparency and regulatory reform continue to prove elusive, however, and the various legislative efforts to date leave many questions unanswered and conceivably conflict with one another. It will be important that the political need to provide a timely response to concerns about transparency and counterparty credit risk be balanced against the need to face head-on the complications that will necessarily be involved in the responsible redesign of a complex and global OTC derivatives market. This article examines proposed legislative and regulatory developments as well as OTC derivatives industry efforts that are likewise afoot, along with associated issues including proposed central clearing requirements; the definition of a standardized derivative; possible margin and capital requirements; reporting, record-keeping, and business conduct standards; preventing manipulation, fraud, and other market abuses; the respective regulatory authorities of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC); and other regulatory issues particular to credit default swaps.