Formerly unregulated over-the-counter derivatives will be regulated under legislation that cleared the House Financial Services Committee.

H.R. 3795, the Over-the-Counter Derivatives Markets Act of 2009, passed by a vote of 43-26. Backers say the new rules will help modernize America’s financial regulatory system by standardizing derivative swaps. Derivatives played a key role in the financial implosion of New York-based American International Group, helping to set off last year’s financial crisis.

Under the bill, transaction between “major swap participants,” would have to be cleared and must be traded on an exchange or electronic platform. The bill defines a major swap participant as anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions creates such significant exposure to others that it requires monitoring.

The legislation would split regulatory authority between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).

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