In today's Washington Post, Mary L. Schapiro, Chairman of the SEC, penned an editorial asking Congress to close the gaps on regulation of swaps. Schapiro offers three pieces of advice to strengthen the provisions covering swaps in the Senate legislation on financial market regulatory reform.
First, Schapiro argues that the Senate bill's language would provide insufficiently clear lines of regulation between financial swaps and commodity swaps, inviting potential gaming of the regulations by market participants, as well as potential abuse. Second, Schapiro urges more transparency to the "shadow market" in which swaps are traded by creating a trade reporting system similar to the one used for corporate debt securities. Third, Schapiro urges the mandating the use of clearinghouses and exchanges for swaps, thereby reducing counterparty credit risk by "substituting the creditworthiness of the clearinghouse for the creditworthiness of the parties to the transaction."
The SEC recently announced that it was taking a hard look at use of derivatives, including swaps, by mutual funds, and also warned about the risks of leveraged and inverse ETFs, that also use swaps, and further has frozen exemptive requests permitting ETFs that would make significant investments in derivatives like swaps. This editorial reflects the ongoing and serious concerns the SEC has with governing the risks posed by swap transactions.
The full text of Chairman Schapiro's Washington Post Op-ed is available at: http://www.washingtonpost.com/wp-dyn/content/article/2010/04/01/AR2010040102801.html?hpid=opinionsbox1