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OTC Legislation Delivered to Congress

On August 10, the Administration delivered the “Over-the-Counter Derivatives Markets Act of 2009” to Congress for approval. This piece of legislation is intended to regulate comprehensively the OTC derivative markets for the first time by providing for "regulation and transparency for all OTC derivative transactions; strong prudential and business conduct regulation of all OTC derivative dealers and other major participants in the OTC derivative markets; and improved regulatory and enforcement tools to prevent manipulation, fraud, and other abuses in these markets."

The bill proposes to subject the credit default swap markets and all other OTC derivative markets to comprehensive regulation in order to:

    1. Guard against activities in those markets posing excessive risk to the financial system;



    1. Promote the transparency and efficiency of those markets;
       

    1. Prevent market manipulation, fraud, insider trading, and other market abuses; and

    1. Block OTC derivatives from being marketed inappropriately to unsophisticated parties.


These goals will be reached through regulation by the Securities and Exchange Commission and the Commodity Futures Trading Commission that includes:

    • Regulation of OTC derivative markets by dividing jurisdiction for the various types of derivatives between the CFTC and SEC;

    • Regulation of all OTC Derivative dealers and other major market participants through registration reporting requirements;

    • Preventing market manipulation, fraud, insider trading, and other market abuses by providing the CFTC and SEC with the tools and information necessary to prevent manipulation, fraud, and abuse, including making transactions more transparent using central clearing and exchange trading, as well as robust prudential regulation;

    • Protecting unsophisticated investors by tightening the definition of eligible investors that are able to engage in OTC derivative transactions to better protect individuals and small municipalities.


The Department of the Treasury's summary of the bill is available at: http://www.treas.gov/press/releases/tg261.htm

The full text of the “Over-the-Counter Derivatives Markets Act of 2009” is available at: http://www.hedgefundlawblog.com/wp-content/uploads/2009/08/over-the-counter-derivatives-markets-act-of-2009.pdf

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