WASHINGTON - The Securities and Exchange Commission is considering asking Congress to amend the securities laws to allow it to impose additional disclosure requirements or "standards of care" on dealers marketing derivatives to small municipalities, Treasury Secretary Timothy Geithner told key members of Congress yesterday.
"Current law seeks to protect unsophisticated parties from entering into inappropriate derivatives transactions by limiting the types of counterparties that could participate in those markets. But the limits are not sufficiently stringent," Geithner said in a three-page letter to Senate Majority Leader Harry Reid, D-Nev., House Speaker Nancy Pelosi other lawmakers that he released at a press conference.
"The SEC and CFTC intend to work together to bolster the definitions around who are eligible participants in a market like this," SEC chairman Mary Schapiro, told reporters yesterday at the press conference. "That's an area that needs significant work."
"We have heard a lot about municipalities that were caught up in the financial crisis," said acting CFTC chairman Michael Dunn. He said the SEC and CFTC will work together to "further define" the regulations.
The letter, which says that the Treasury has been consulting with the CFTC, SEC and other federal regulators to design a comprehensive regulatory framework for over-the-counter derivatives, clearly envisions the CFTC and SEC sharing regulatory responsibility for derivatives, and presumably the SEC would oversee financial derivatives.
The Treasury secretary also said Congress should consider writing legislation that would authorize the SEC and the CFTC impose recordkeeping and reporting requirements, "including an audit trail," on all over-the-counter derivatives.
"Central counterparties and trade repositories should be required to, among other things, make aggregate data on open positions and trading volumes available to the public and to make data on any individual counterpary's trades and positions available on a confidential basis to the CFTC, SEC and the institution's primary regulators," Geithner said in the letter.
Geithner said that federal regulation of the OTC derivatives markets should be designed to achieve four broad objectives: preventing activities in those markets from posing risk to the financial system; promoting the markets' efficiency and transparency; preventing market manipulation, fraud and other abuses; and ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties.
"To achieve these goals, it is critical that similar products and activities be subject to similar regulations and oversight," he said.
Municipal Securities Rulemaking Board executive director Lynnette Hotchkiss said yesterday: "The MSRB board continuously monitors derivative activity in the municipal market and earlier this year it called for municipal derivatives to be included in the same regulatory framework that is established for the broader derivatives market.
"In addition, beginning July 1 the EMMA system will provide for issuers to file on a voluntary basis disclosures with regard to derivatives that they wish to submit. EMMA can also easily be utilized for a transparency and disclosure vehicle for the municipal derivatives market."
