SEC sets limits on derivatives industry in US

City A.M. Reporter
THE top US securities regulator last night took its first stab at policing the $615 trillion (£387 trillion) over-the-counter derivatives market with a plan to mitigate conflicts of interests at venues that will handle the swaps.

The Securities and Exchange Commission voted 5-0 to propose ownership limits on the swaps trading venues and clearinghouses, which will assume the risk if one party defaults.

The derivatives -- financial instruments companies use to hedge risk such as interest rates -- have been fingered for contributing to the worst financial crisis since the Great Depression.

“This proposed rule is intended to make these entities less susceptible to promoting the interests of a few participants to the potential detriment of others,” said SEC chairman Mary Schapiro.

The SEC and fellow market regulator the Commodity Futures Trading Commission are crafting dozens of rules to regulate the opaque market under the Dodd-Frank financial reform bill.

The SEC proposed two plans to crack down on potential conflicts at clearinghouses whose members could try to limit which products could be cleared.

Under the SEC’s first plan, a clearinghouse member could only hold up to 20 per cent of a clearinghouse. Members collectively could only be allowed to hold up to 40 per cent of a clearinghouse, and a third of the clearinghouse’s board of directors must be independent.

Under the alternative plan, a clearinghouse member would only be allowed to own a five per cent voting stake and the majority of the venue’s board would have to be independent directors. The SEC’s proposal is similar to a plan the CFTC floated earlier in October, though the securities regulator is pushing for more independent board directors.