CFTC Concept Release on Over-the-Counter Derivatives

Washington, DC, May 13, 1998 - The Commodity Futures Trading Commission has issued a concept release seeking comment on whether it should modify its approach to the over-the-counter derivatives market in light of recent developments in the marketplace. The release emphasizes that any new regulatory restrictions would be adopted only after publication for additional public comment, and that the release does not change the status of any instrument or transaction under the Commodity Exchange Act. It states that "[a]ll currently applicable exemptions, interpretations, and policy statements issued by the [CFTC] remain in effect, and market participants may continue to rely upon them."

The release describes the current regulatory framework under which certain swaps and hybrid instruments are exempted or excluded from CFTC regulation. The release notes that, pursuant to existing exemptions, OTC derivatives market activities generally involve decentralized, principal- to-principal transactions between large traders. Although these characteristics distinguish the OTC derivatives market from exchange-traded markets, according to the release, various developments in the last five years indicate a need to review the current exemptions. These developments include: (1) new end-users of OTC derivatives; (2) the development of new products; (3) an increasing standardization of products; (4) proposals for centralized clearing and execution; and (5) explosive growth in the market, accompanied by an increase in the number and size of losses.

The release solicits comments on a number of issues related to its consideration of possible modifications to the current exemptions. These issues are divided into several categories, including eligible transactions, eligible participants, clearing, transaction execution facilities, registration, capital, internal controls, sales practices, recordkeeping, and reporting. In each case, the release raises a variety of general and specific questions for commenters to address. For example, with respect to sales practices, the release requests comments on topics such as whether OTC derivatives dealers should be subject to any specific risk or other disclosure requirements, and whether they should be required to collect any information from their customers (e.g., information demonstrating that the customer is authorized to enter into the transaction).

The release also seeks comments on self-regulation as a component of the regulatory oversight of the OTC derivatives marketplace.

According to the release, CFTC Commissioner Barbara Pedersen Holum dissented from the decision to issue the release "in its current form," on the basis that it "goes beyond the scope of regulatory review by exploring areas that may be inapplicable to an OTC market."