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The President's Working Group on Financial Markets on Tuesday unanimously recommended changes to the Commodities Exchange Act that are designed to create legal certainty in the over-the-counter derivatives markets and reduce systemic risk.

"Our new financial system has to be based on old virtues," Treasury Secretary Summers, Chairman of the Working Group, said. "As we worked to clarify the legal framework for OTC derivatives, we were guided by time-tested principles of competition, efficiency and transparency. If enacted, these changes will strengthen the financial system by improving a segment of the market which helps American businesses to hedge and manage risk more effectively and reduces borrowing costs for both individuals and corporations."

As members of the President's Working Group on Financial Markets, the Treasury Secretary and the Chairmen of the Securities and Exchange Commission, the Commodities Futures Trading Commission and the Board of Governors of the Federal Reserve System, studied the existing regulatory framework, recent innovations, and the potential for future developments in the over-the-counter derivatives markets.

Among the report's recommendations are:

  • Creating an exclusion from the CEA for swaps agreements that are bilateral agreements between eligible parties on a principal-to-principal basis. (The exclusion does not extend to agreements involving non-financial commodities with finite supplies).

-- This recommendation provides greater legal certainty and removes doubts about enforceability, making the
U.S. a more attractive derivatives market.

  • Creating an exclusion from the CEA for electronic trading systems that limit participation to sophisticated parties trading for their own accounts. (Again, the exclusion does not apply to systems used to trade contracts that involve non-financial commodities with a finite supply.)

-- This recommendation promotes innovation, competition, efficiency, liquidity and
transparency and encourages the development of electronic trading systems.

    • Removing legal impediments to the development of clearing systems for OTC derivatives, while requiring that such systems be subject to appropriate regulation.

-- This recommendation reduces systemic risk by encouraging appropriately regulated clearing for OTC

    • Clarifying the Treasury Amendment to enable the CFTC to address the problems associated with foreign currency "bucket shops" while excluding all other transactions in Treasury Amendment products from the CEA, unless they are conducted on an organized futures exchange.

-- This recommendation helps to create legal certainty and protects retail customers from unfair practices.

  • Clarifying the exempt status of hybrid instruments that reference securities and modifying the CFTC's "exclusive jurisdiction" clause to prevent limitations on the authority of the SEC and the bank regulatory agencies with regard to hybrid instruments.

-- These recommendations, while technical in nature, enhance legal certainty by clarifying that hybrid
instruments that reference securities can be exempted from the CEA and they resolve potential
jurisdictional disputes between regulators by limiting the exclusive jurisdiction clause.

Additionally, the Working Group recommends that Congress clarify the CFTC's authority to provide appropriate regulatory relief for exchange-traded derivatives when the CFTC deems such relief to be consistent with the public interest. The report also suggests approaches to other related issues including single stock futures, enhanced reporting authority for unregulated affiliates of broker-dealers, and close-out netting provisions in bankruptcy and bank insolvency law.



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