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Proposed Changes to Regulation of OTC Derivatives and CDSs

By Harvard Law School Program on Corporate Governance

Recently, the House Energy and Commerce Committee Chairman Henry A. Waxman and Subcommittee Chairman Edward J. Markey introduced H.R. 2454, the American Clean Energy and Security Act of 2009 (the ?Waxman-Markey Bill? or the ?Bill?). The Energy and Commerce Committee approved the Bill on May 21, 2009. Eight other House panels, including Financial Services, have jurisdiction to review the Bill. The Waxman-Markey Bill comprehensively addresses a broad range of issues relating to energy and climate change policy.

Subtitles D and E of Title III of the Waxman-Markey Bill contain significant provisions relating to the regulation of over-the-counter (?OTC?) derivatives generally and energy derivatives in particular (the ?Derivatives Provisions?). First, the Bill would shut the Enron Loophole, the London Loophole and the Swaps Loophole. Second, the Bill would subject all OTC derivatives to centralized clearing. Third, the Bill would make ?naked? credit default swaps illegal and rescind the preemption of state gaming laws with respect thereto. Finally, the Bill would give the Commodity Futures Trading Commission initial jurisdiction over markets for ?regulated allowance derivatives? to regulate in the same manner as energy transactions.

In a memorandum entitled “Derivatives Provisions in the American Clean Energy and Security Act of 2009,” Daniel N. Budofsky, Robert L. D. Colby, Faisal Baloch and I provide a brief background on energy derivatives regulation to place the Waxman-Markey Bill in context. We then summarize and discuss the key Derivatives Provisions of the Bill.

The memorandum is available here.

In another memorandum, entitled “The National Conference of Insurance Legislators? Model CDS Bill,” Bjorn Bjerke, Daniel N. Budofsky, Robert L. D. Colby, Ethan T. James and I describe model legislation being drafted by the NCOIL that would subject credit default swaps to a state regulatory regime closely modeled on that regulating financial guaranty insurance in New York. The memo discusses NCOIL?s plans for a state CDS regulatory regime and explores the implications of such a regime on the CDS market. That memo is available here.

Full post as published by The Harvard Law School Corporate Governance Blog on June 10, 2009 (boomark / email).