04 June 2009 22:39 [Source: ICIS news]
HOUSTON (ICIS news) --The head of the US Commodities Futures Trading Commission (CFTC) made a plea for reforms to regulate over-the-counter (OTC) derivatives during testimony on Thursday in Washington before the US Senate Committee on Agriculture, Nutrition and Forestry.
“We must urgently enact broad reforms to regulate OTC derivatives,” said CFTC chairman Gary Gensler.
Gensler called on lawmakers to expand the CFTC's enforcement powers over swaps and give the agency the authority to set position limits across all markets to prevent manipulation and excessive speculation.
"By fully regulating the institutions that trade or hold themselves out to the public as derivative dealers we can oversee and regulate the entire derivatives market," Gensler said.
"All derivative dealers should be subject to capital requirements, initial margining requirements, business conduct rules and reporting and record-keeping requirements," he said.
The hearing was the first congressional hearing since the Obama administration rolled out its plan in May to bring over-the-counter derivatives under federal regulation - a market that was deregulated with the passage of the Commodity Futures Modernization Act in 2000.
The plan aims to avert another financial crisis, which many believe was caused in part by large firms using exotic financial instruments like credit-default swaps to engage in reckless and risky trades.
A portion of the Obama plan targets derivative dealers such as Goldman Sachs, Morgan Stanley and American International Group (AIG) by subjecting them to new capital and margin requirements and forcing them to adhere to strict business conduct standards and report certain data to regulators.
In addition, the CFTC wants standard over-the-counter contracts to be traded on an exchange to make prices more transparent. Contracts would also need to go through clearinghouses, which guarantee trades and help cushion the blow to the market if a counterparty defaults.
The Obama plan also contains provisions to help prevent against manipulation and excessive speculation by allowing the CFTC to set position limits on OTC contracts if they play a major role in helping to set market prices.
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