The Obama administration set out a white paper recommending far-reaching changes in the regulation of OTC derivatives, but the proposals did not bring anything new to the table.

Industry players said that the derivatives' aspects are largely the same terms announced by Secretary Timothy Geithner on May 13.

"One of the primary drivers behind the administration's proposal to establish a comprehensive regulatory framework for OTC derivatives is the view, as expressed in the white paper, that the buildup of risk in OTC derivatives became 'a major source of contagion' through the financial sector during the financial crisis," Morrison & Foerster lawyers said in a published note.

The white paper's proposals regarding the regulation of the OTC derivatives markets are intended to achieve the same four objectives that Geithner outlined back in May.

First, the regulations are trying to prevent activities threatening the stability of the financial system. They also aim to promote market efficiency and transparency and to deter market manipulation, fraud and similar abuses. The new rules are also supposed to ensure that OTC derivatives are not marketed inappropriately to 'unsophisticated' retail investors.

The white paper noted that a critical element in achieving these four objectives is that similar products and activities must be subject to similar regulations and oversight. "What's interesting here is that we have a view on how the whole financial market restructuring will work with what is being proposed for the derivatives space, though this newest set of regulations won't put the market any closer to solutions," a market source said.

Again, consistent with prior announcements, the white paper proposes statutory authority to mandate the central clearing of all standardized OTC derivatives through regulated central counterparties, or CCPs. This requirement is intended to improve market efficiency and price transparency. Both the Securities and Exchange Commission and the Commodity Futures Trading Commission would have authority to regulate the OTC derivatives markets and the CCPs. CCPs would be required to impose robust margin requirements and other necessary risk controls.

The regulations would also ensure that customized OTC derivatives are not used solely as a means to avoid clearing OTC derivatives through a CCP. For purposes of distinguishing between "standardized" and "customized" OTC derivatives, an OTC derivative will be presumed to be a standardized contract if it is accepted for clearing by one or more fully regulated CCPs.

(c) 2009 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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