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Derivatives World About To Get Rude Awakening From CFTC

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The word is out on the Obama administration's plan for derivative regulation. CFTC Chairman Gary Gensler outlined the plan before the Senate Committee on Agriculture, Nutrition, and Forestry today. Derivative dealers can look forward to new rules surrounding, "capital requirements, initial margining requirements, business conduct rules and reporting and record keeping requirements." In his testimony Gensler stated that the new rules aim to achieve four main objectives:

• Lower systemic risks;
• Promote the transparency and efficiency of markets;
• Promote market integrity by preventing fraud, manipulation, and other market abuses, and by setting position limits;
• Protect the public from improper marketing practices.

Regarding the highly scrutinized world of customized derivatives, Gensler set out four criteria for determining whether or not a derivative contract qualifies as customized and therefore avoids the requirement of trading through an exchange:

•The volume of transactions in the contract;
•The similarity of the terms in the contract to terms in standardized contracts;
•Whether any differences in terms from a standardized contract are of economic significance;
•The extent to which any of the terms in the contract, including price, are disseminated to third parties

And so it begins.