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SEC, CFTC to Divide Jurisdiction on Derivatives Regulation


July 30, 2009
Carol E. Curtis


The Securities and Exchange Commission or the Commodity Futures Trading Commission, or potentially both, will oversee the regulation of OTC derivative dealers, exchanges and clearinghouses, according to a broad agreement announced today by two key Congressmen, House Financial Services Committee Chairman Barney Frank, D-MA., and House Agriculture Committee Chairman Collin Peterson, D-MN. The deciding factor in determining which agency has authority will be the underlying asset on which the derivative is based, according to a concept paper jointly released by the legislators.


The Financial Services Oversight Council, a new body made up of the heads of the major regulators, will resolve disputes between the SEC and the CFTC over regulation or joint regulation of new products within 180 days, the agreement said.


While some regulators have supported combining the SEC and the CFTC, Frank and Peterson agreed that such a merger would be highly complex, and therefore likely to delay derivatives legislation.


Under today’s agreement, which promises “robust oversight of dealers and markets,” derivatives must be cleared by an approved clearinghouse. “Exchange trading and trading on electronic platforms will be strongly incentivized and encouraged,” it said, adding that “Regulators should have authority to prohibit or regulate transactions that are not traded on an exchange or cleared.”


Primary oversight authority of the credit default swaps (CDS) clearinghouse, ICE Trust, will be shifted from the Federal Reserve to a market regulator within six months of enactment of enabling legislation, the paper said.


Other key parts of the agreement provide that all OTC derivative trades must be reported to a qualified trade repository; requests for approval to serve as a clearinghouse, exchange or electronic trade platform must be acted on by the appropriate agency within 180 days; and the statutory and regulatory powers of the SEC and the CFTC are to be harmonized with respect to the OTC derivatives market, including registration requirements for dealers.


Frank and Peterson said they plan to begin work on derivatives legislation in September.


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