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July 05, 2011
Council of Institutional Investors Supports Dodd-Frank Regulation of Derivatives Market
    by Robert Kropp

In a letter, the CII calls on the Commodity Futures Trading Commission to reduce risk to the financial system by mandating that previously unregulated swaps meet margin requirements.

The Dodd-Fra nk Wall Street Reform and Consumer Protection Act provided the Commodity Futures Trading Commission (CFTC) with a number of additional powers for the regulation of over-the-counter derivatives. One of the mandates of the bill addresses the regulation of swaps, which have not previously been regulated in the US.

According to the New York Times, the market for credit default swaps, which were created on Wall Street in the late 1990s, grew to over $30 trillion by 2008. "In sharp contrast to traditional insurance, swaps are totally unregulated," the Times wrote. "They played a pivotal role in the global financial meltdown in late 2008."

The CFTC recently announced that it has extended until December 31 the implementation of many of the new regulations. Nevertheless, it is seeking comment on them, and last week the Council of Institutional Investors (CII) weighed in with a letter to the CFTC addressing the issue of margin requirements for uncleared swaps.

Citing a 2009 report from the Investors' Working Group (IWG), which argued that all over-the-counter (OTC) should be subject to margin requirements, the CII stated in its letter, "Swaps and security-based swaps involving a non-financial entity should not be exempt from margin requirements, as requiring margin reduces risk to taxpayers and the financial system."

"Enhancing the safety of the derivatives market is enormously important," the letter continued.

While security-based swaps such as credit default swaps (CDS) will remain under the supervision of the Securities and Exchange Commission (SEC), the CTFC will be responsible for the regulation of commodity and equity swaps, as well as broad-based credit derivatives indexes that have more than nine components.

Noting the potential for confusion in such an arrangement, the report from the IWG suggested that "efficiencies may be obtained through the merger of the SEC" and the CFTC.


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