SEC's Schapiro's Derivatives Proposal: Much Ado About Nothing

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SEC’s Mary Schapiro testified today before the House Agriculture Committee on ways to regulate over-the-counter derivatives, which present a number of risks, “chief among them is systemic risk.”

In a prepared testimony, she outlines four goals: preventing activities in the OTC derivatives markets from posing risk to the financial system promoting efficiency and transparency of those markets; preventing market manipulation and fraud; ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties.

While the SEC’s efforts seem noble, one has to wonder if the agency has a ready to use framework for proposing legislation. This seems reminiscent of rules it proposed about how to regulate hedge funds. Same goals, same terminology. No details or clarification.

And in her testimony, it seems like Schapiro herself is a bit confused about the whole process. She recognises that the “efforts” the SEC made to work nicely (got to love the prose: “Our two agencies have already begun an ambitious program of joint work to better harmonize our rules and procedures”) she is quick to add that “some differences may remain over time.”

Yes, that joint effort has allowed them to split responsibilities (the SEC would have regulatory responsibility for securities-related OTC derivatives, while the CFTC would cover the other ones.) but this could also result in significant regulatory differences between “swaps” products and the currently “regulated” (side note, why the use of quotes here?) securities and futures products.

She says in the testimony that this could “perpetuate existing regulatory arbitrage opportunities.”

In then end SEC, your proposal is much ado about nothing.

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