Thursday, June 11, 2009

Waxman-Markey Bill Closes OTC Loopholes

H.R. 2454, entitled the "American Clean Energy and Securities Act of 2009," a bill sponsored by Representatives Henry Waxman (D-CA) and Ed Markey (D-MA), contains provisions (Title III, subtitles D and E) that would close many of the regulatory loopholes related to over the counter ("OTC") securities. 

Among the changes to OTC regulation this bill proposes are:
  1. closing the "Enron Loophole," which exempts from regulation most OTC energy trades and trading on electronic energy commodities markets like the Alanta-based Intercontinental Exchange (ICE);

  2. closing the "London-Dubai Loophole" which exempts from U.S. regulation trading in U.S. contracts for crude oil futures on U.S. soil, conducted on U.S. computer terminals that are operated by foreign-owned exchanges like ICE;

  3. closing the "Swaps Loophole" which exempts from regulation by treating financial institutions that buy and sell futures contracts on the futures exchanges as bona fide hedgers, even if the only purpose of their futures trading is to hedge the financial risk they acquired by acting as a swaps dealer in the over‐the‐counter markets.;

  4. require centralized clearing for all OTC derivatives; and

  5. making "naked" credit default swaps illegal and preempt state regulation of these swaps.  Under this provision, a person would not be able to enter into a credit default swap unless that person:
  • owns a credit instrument referenced by the CDS;

  • would experience financial loss if an event that is the subject of the CDS with respect to the credit instrument were to occur; and

  • meets minimum capital adequacy standards established by the CFTC in consultation with the Federal Reserve.
The bill would also give the Commodity Futures Trading Commission initial jurisdiction over markets for “regulated allowance derivatives” to regulate in the same manner as energy transactions.  These "regulated allowance derivatives" are instruments that will be created to trade carbon emission allowances set by the cap and trade portions of the Waxman-Markey bill. 

The full text of the Waxman-Markey bill is available at: