24 June 2009

SEC's Schapiro: "SEC should be primary regulator of OTC Derivatives"

"The primary responsibility for the regulation of “securities-related” over-the-counter derivatives, should be with the SEC," Chairman Mary Schapiro told the US Senate's Banking Committee.

The primary responsibility for the regulation of “securities-related” over-the-counter derivatives should lay with the SEC, Chairman Mary Schapiro told the Senate Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance, and Investment during a June 22 hearing.

 

“The direct link between securities-related OTC derivatives and securities is such that SEC regulation of the former is essential to the effectiveness of the SEC's statutory mission with respect to the securities markets,” Schapiro said. “The securities regulatory regime is specifically designed to promote the congressional objectives for capital markets, which include investor protection, the maintenance of fair and orderly markets, and the facilitation of capital formation.

 

It is important that securities-related OTC derivatives be subject to the federal securities laws so that the risk of arbitrage and manipulation of interconnected markets is minimized.”  She also said Congress should subject securities-related OTC derivatives to federal securities laws.

 

Schapiro said that can be done by clarifying the definition of “security” to expressly include securities-related OTC derivatives, and removing the current express exclusion of swaps from that definition. If this is done, the SEC would have authority to regulate securities-related OTC derivatives regardless of whether the products are traded on an exchange or over the counter, and regardless of how the products are cleared.

 

By including securities-regulated OTC derivatives under the SEC's reach, the agency would have responsibility over the portion of the OTC derivatives market that is vital to promote its mission of investor protection, the maintenance of fair and orderly markets, and the facilitation of capital formation. The SEC would continue to regulate OTC derivatives that have always been considered securities, such as OTC security options, certain OTC notes, and forward contracts on securities.

 

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