WASHINGTON - Broker-dealer counterparties of municipal interest rate swaps and other customized over-the-counter derivative contracts would have to meet much higher capital and margin requirements than for standardized derivatives contracts under the Obama administration's regulatory reform proposals, Treasury Secretary Timothy Geithner told lawmakers Friday.
At a joint hearing of the House Agriculture and Financial Services committees that demonstrated their efforts to share jurisdiction over derivatives, Geithner said the higher capital and margin requirements would be designed to both cover the increased risks that customized products pose and to deter dealers from customization to avoid central clearing and exchanges. Standardized OTC derivatives would have to be centrally cleared or exchange-traded under the administration's plan.
Several lawmakers suggested the administration simply mandate central clearing for all OTC derivatives. "We would be barring customized products," Geithner responded, saying the administration does not want to do that.
Under the plan, all OTC derivatives would be subject to reporting, disclosure, capital and margin requirements as well as possible enforcement action by either the Securities and Exchange Commission or the Commodity Futures Trading Commission.
"We are proposing comprehensive oversight over all of these products," Geithner said.
While lawmakers and administration officials have agreed not to merge the SEC and CFTC as the administration initially had proposed, Geithner did not rule out such a merger in the future.
"There are a lot of compelling reasons for merging those two agencies," he said. The Treasury is currently working with the SEC and CFTC to harmonize their rules.
"They've made a lot of progress but they are not there yet," Geithner said referring to a looming Sept. 30 deadline for completion of that project.
Once the agencies' rules are in line with each other, that will "provide a better basis for Congress to consider reforms in the future," Geithner said, prompting Financial Services Committee chairman Barney Frank, D-Mass., to groan at the prospect of "several more years" of regulatory reform.
Meanwhile, several Republicans complained to Geithner that the economic stimulus law enacted in February is not working because unemployment has risen and banks are still reluctant to lend money.
Their complaints upset Rep. Leonard Boswell, D-Iowa, who was applauded when he said: "We all ought to be involved in making this a success ....We ought to be hoping and praying this will work."
Geithner defended the stimulus law, saying it was critical in stabilizing the economy and slowing the rate of decline.
"There has been substantial improvement in arresting the worst recession" in decades, he said. Unemployment typically rises during recessions, Geithner said, adding that Americans who have spent years borrowing and spending beyond their incomes must learn to "live within their means."