Regulators Conclude Derivatives Don't Need CEA Rules

November 10, 1999

The President's Working Group on Financial Markets concludes that "under many circumstances"financial derivatives trading by eligible swap participants should be excluded from any Commodities Exchange Act jurisdiction.

Derivatives are investments with values linked to such factors as interest rates or currency exchange rates. The Bank for International Settlement estimates that total derivatives contracts in 1998 reached $80 trillion.

Not to exclude over-the-counter derivatives from the CEA "would perpetuate legal uncertainty or impose unnecessary regulatory burdens and constraints upon the development of these markets in the United States."

The working group also concluded that "it is important to remove legal impediments to the development of electronic trading systems which have the potential to increase market liquidity and transparency and appropriately regulated clearing systems which can reduce systemic risk by allowing for the mutualization of risks among market participants and by facilitating offset and netting of contractual obligations."

Legislation was recommended to "clearly exclude most over-the-counter financial derivatives" from the CEA, but "this does not mean that transactions may not, in some instances, be subject to a different regulatory regime or that a need for regulation of currently unregulated activities may not arise in the future."

U.S. futures exchanges trade products that often compete directly with over-the-counter derivatives, but are more heavily regulated. The exchanges have expressed concern about new trading systems which they assert are indistinguishable from established exchanges, but are not under government oversight

The entire report is available on the Internet at http://www.ustreas.gov/press/releases/report.htm.