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Did Treasury Adopt Part of Wall Street's OTC Derivatives Plan?

By Anonymous

One of the headlines on Bloomberg's front page is, "Geithner Adopts Part of Goldman, JPMorgan Plan for Trading in Derivatives" (when you click through to the article, the headline is "Geithner Adopts Part of Wall Street Derivatives Plan"). Bloomberg reporter Matthew Leising got his hands on a plan for regulating OTC derivatives that Goldman, JPMorgan, Credit Suisse, and Barclays sent to Treasury a few months ago. Leising contends that Treasury's proposal for regulating OTC derivatives "contains recommendations similar to those made by" the banks. The clear implication is that Treasury has bowed to pressure from the Wall Street banks, and has adopted a very bank-friendly plan.

But, bizarrely, Leising can only point to one alleged similarity between the banks' proposal and Treasury's proposal?and that similarity turns out to be illusory. What's more, Treasury's proposal differs from the banks' proposal on several key issues, as Leising himself reports.

First, here's the alleged similarity between the two proposals:

"All OTC dealers and other firms who create large exposures to counterparties should be subject to a robust regime of prudential supervision and regulation," [Treasury's] proposal said. These included "conservative capital requirements," "reporting requirements," and "initial margin requirements."

The bank-written plan, dated Feb. 13, said the systemic regulator "shall promulgate rules" requiring "capital adequacy," "regulatory and market transparency" and "counterparty collateral requirements."

It's very clear that Treasury didn't actually give the banks what they wanted here. The banks' proposal called for all participants in the OTC derivatives markets?and not just the dealers?to be subject to capital and margin requirements. Essentially, the banks are saying that if they're going to be subject to strict capital and margin requirements for OTC derivatives, then everyone else in the OTC derivatives markets should be subject to those requirements too. By contrast, under Treasury's proposal, the "conservative" capital and margin requirements would only apply to the dealers and "other firms who create large exposures to counterparties." In other words, non-dealers who don't create large exposures to counterparties wouldn't be subject to the enhanced capital and margin requirements. (This is why one of the most important issues is how Treasury plans to define "firms who create large exposures to counterparties," which I'll address in another post.)

Amazingly, this non-issue is the entire basis for the headline, "Geithner Adopts Part of Goldman, JPMorgan Plan for Trading in Derivatives." Leising literally doesn't identify any other similarities between Treasury's proposal and the banks' proposal.

In fact, Leising himself admits near the end of the article that "Geithner?s plan goes further in many aspects than what the banks laid out in their draft." For instance, the banks' proposal doesn't require central clearing for any OTC derivative, while Treasury's proposal requires central clearing for all standardized OTC derivatives, and "encourages" the use of exchanges for standardized instruments. Also, the banks propose giving the Fed sole authority over the OTC derivatives markets, while Treasury declines to weigh in on which agency should regulate OTC derivatives.

Finally, the banks propose that reporting requirements on trade data should be made to regulators only "upon request." Under Treasury's proposal, all bespoke OTC derivatives would have to be reported to a regulated trade repository, and all such trade repositories, as well as the central counterparties clearing standardized OTC derivatives, would be required to "make data on individual counterparty?s trades and positions available to federal regulators."

To sum up:

1. The only aspect of Treasury's OTC derivatives proposal that the Bloomberg article claims was lifted from the Wall Street banks' proposal is, in reality, materially different from the banks' proposal.

2. Treasury's proposal is much more stringent than the banks' proposal on key issues, such as: (a) mandatory clearing for standardized instruments; and (b) full disclosure to federal regulators of individual trades and positions in both standardized and bespoke instruments.

So to answer the question in the title of my post: No, Treasury didn't adopt part of Wall Street's OTC derivatives plan.

Full post as published by Economics of Contempt on May 24, 2009 (boomark / email).