Legislation Needed for OTC Benefits

February 16, 2000

Treasury Assistant Secretary Lee Sachs says legislation is necessary to take full advantage of the business and consumer benefits available from over-the-counter derivatives. With the existing regulatory framework, there is a risk those benefits will not be fully realized, he adds.

"The OTC derivatives market can make a valuable contribution to the efficient functioning of the American capital markets, with benefits for both businesses and consumers," he told the House Agriculture Subcommittee on Risk Management. "Under the existing regulatory framework ... there is a risk that these benefits will not be fully realized."

C. Robert Paul, general counsel, Commodity Futures Trading Commission, said Congress should exclude OTC financial derivatives from the Commodity Exchange Act to provide greater legal certainty for the OTC market.

"OTC derivatives transactions as we know them today do not present regulatory concerns within the scope of the act," said Paul. "Excluding this activity will not diminish the CFTC. s ability to carry out the statutory mission it is charged to fulfill."

Daniel Rappaport, chairman, New York Mercantile Exchange, said the NYME "strongly supports" a recommendation from the President. s Working Group on Financial Markets report that derivatives trading "should not be subject to regulations that do not have a public policy justification."

That principal should apply to derivatives transactions generally, whether trade in the OTC market or in a market regulated by the CFTC, said Rappaport.

Scott Gordon, board chairman, Chicago Mercantile Exchange, said the working group. s report "does almost nothing" to address the issues of "regulatory disparities and blurred product distinctions that handcuff U.S. futures exchanges in today. s competitive global market."

The CME, Chicago Board of Trade and NYME worked "for some time" to change the "underlying philosophy of financial service regulation," said Gordon. "We supported legal certainty for privately negotiated over-the-counter transactions, sought major revisions to the Shad/Johnson Accord and called for rationalization of regulation for the entire financial services industry."

Any legislation should be "fair and even-handed," Gordon added. "Our goal was equivalent regulatory treatment for functionally equivalent execution facilities, clearinghouses and intermediaries ... we are disappointed that our efforts to create a fair and level plying field have not been heeded" by the working group.