28 April 2010

SEC Walter criticises confusions on regulatory proposals of the OTC derivatives market

We do not need regulation that makes the regulatory system even more complicated and incoherent, the Commissioner criticised the Lincoln bill. Instead, all securities-related swaps should be regulated by the SEC and all commodities-related swaps should be regulated by the CFTC, Walter proposed.

SEC Commissioner Walter outlined the different positions on important regulatory reform developments in the House and Senate and commented on them with her own views. In particular, she warned against regulatory gaps stemming from the different proposals.

 

Regulation of Hedge Funds and Hedge Fund Advisers

The House bill and the Dodd bill intend to require many hedge fund advisers to register with the SEC, and thus be subject to the full investment adviser regulatory regime. The bills also contain recordkeeping, reporting, and information-sharing provisions that are important to effective examination of these entities

 

However, differences in the Dodd bill and the House bill could lead to new regulatory gaps, the Commissioner warned. The Dodd bill would provide exemptions from registration for venture capital and private equity fund advisers, while the House bill would do the same for venture capital funds. Since most rules under the Advisers Act apply only to advisers that are registered, this could result in new regulatory gaps.

 

Furthermore, both bills would increase the assets-under-management dollar threshold for investment advisers to register with the Commission which would actually mean that more advisers would leave our oversight than come under it, Walter warned.

 

Regulation of OTC Derivatives

The House bill and the Dodd bill will increase market transparency. They would bring currently unregulated swaps, swap dealers, major swap participants, and swap markets under a fairly comprehensive regulatory framework, and would facilitate the standardization and central clearing of swaps.

 

Also these bills could be strengthened in several ways to further avoid regulatory gaps and eliminate regulatory arbitrage opportunities, Commissioner Walter said, as the regulation of the securities markets and the futures markets currently is split between the SEC and CFTC. Congress should seek to merge the regulatory oversight responsibilities of the SEC and CFTC, she underlined.

 

Under the House and Dodd bills, a securities-related swap based on nine or fewer securities would be regulated by the SEC, while a securities-related swap based on 10 or more securities would be regulated by the CFTC. The most sensible approach would be for all securities-related swaps to be regulated by the SEC and all commodities-related swaps to be regulated by the CFTC, Walter proposed.

 

Finally, under the Lincoln bill the bulk of the securities-related swap market could be regulated by a non-securities regulator. “This makes no sense when you consider that securities-related swaps are the economic equivalents of securities”, she criticised.

To compound the problem, the Lincoln bill would expand the definition of swap to include certain instruments that are currently regulated as securities, such as options and forward contracts on broad-based security indexes, Walter outlined. As a result, these instruments would no longer be subject to the full protections of the federal securities laws.

 

Full speech

 

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