Derivative Regulation Taking Shape

The U.S. Treasury Department has released its plan to oversee the heretofore unregulated derivatives market, widely regarded as an impetus for the ongoing financial crisis. Dubbed the "Over-the-Counter Derivatives Markets Act of 2009,” the legislation is intended to regulate derivative dealers and other major market participants.

The plan grants oversight responsibility primarily to the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) and, in certain instances, "prudential" regulators including the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

"Under the Administration's legislation, the OTC derivative markets will be comprehensively regulated for the first time," the Treasury Department said in a statement. "The legislation will provide 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 federal efforts compliment previous announcements by state officials to regulate derivatives. In July, the National Conference of Insurance Legislators (NCOIL) released details about its draft model that would regulate certain CDS as insurance products. The NCOIL law would mandate licensing of credit default insurers and impose solvency standards, such as minimum capital and surplus, as well as contingency, loss and unearned premium reserve requirements on such insurers.