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Legislative Updates: August 2009


Capitol Call

July was the busiest month of a very busy 111th Congress, with the House Financial Services Committee (HFSC) holding a staggering 18 hearings, including several days with two hearings in one day. The Senate Banking Committee (SBC) kept up the pace by holding a surprising 14 hearings in July, an unusually high amount. The hearings, while plentiful, were also insightful and should provide a basis for developing regulatory reform legislation later this year.

Toward the end of July, HFSC Chairman Barney Frank (D-MA) and House Agriculture Committee Chairman Collin Peterson (D-MN) agreed on a framework for legislation to regulate OTC derivatives. They held a joint press conference on July 30 to announce that their consensus framework, which has yet to be formally introduced, will be marked up in the HFSC when Congress returns in September. Chairman Peterson has already passed derivatives legislation out of his Committee and it will be merged with the HFSC version later in the fall.

It appears that the two chairmen have, for the most part, settled their jurisdictional differences and are ready to work together. Their framework legislation includes mandatory clearing of OTC derivatives by an approved clearinghouse, but does allow for special exceptions if the product is not sufficiently standardized to be cleared or no qualified clearing mechanism exists. It also requires regulators to develop margin and capital requirements that create incentives for dealers and users to trade OTC derivatives on exchanges or have them cleared whenever possible. In addition, the CFTC and SEC are given authority to impose position limits on market participants.

Our regulators also had a busy July, with Securities and Exchange Commission (SEC) Chairman Mary Schapiro appearing before Congress three times in less than two weeks and CFTC Chairman Gary Gensler also making a rare appearance before the HFSC. In addition, Treasury Secretary Tim Geithner testified before a joint Agriculture-HFSC hearing on the Administration’s proposal to regulate OTC derivatives.

All this testimony helped the Administration to explain its proposal to regulate OTC derivatives and aided Congress in coming up with a consensus on what it wanted in its legislation. It also provided an opportunity for the SEC and CFTC to explain to Congress what their legislative priorities will be in this debate. SEC Chairman Schapiro, in particular, used her appearances before Congress to assure skeptical lawmakers that the SEC is committed to restoring investor confidence in our markets and has been actively working to strengthen enforcement by creating new procedures and streamlining SEC management.

Back at the office the SEC staff was hard at work not only preparing Chairman Schapiro for her appearances before Congress but finalizing the interim short-sale rule known as Rule 204T. The rule, in place on a temporary basis since the fall of 2008 and set to expire on July 31, was designed to prevent naked short selling and fails-to-deliver abuse while also increasing public disclosure of short sale activities in the markets.

The new rule, Rule 204, requires broker-dealers to promptly purchase or borrow securities to deliver on a short sale, thereby eliminating naked short sales. In addition, the SEC will hold a public roundtable on September 30 to discuss securities lending, pre-borrowing, and possible additional short sale disclosures. Rule 204 is separate from the SEC’s work on the Uptick Rule, on which the Committee will make a final decision later this year.

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