On May 13, 2009, the U.S. Department of the Treasury (the “Treasury Department”) announced a framework for regulatory reform (the “Reform Framework”) relating to over-the-counter (“OTC”) derivatives transactions. In announcing the Regulatory Framework, the Treasury Department noted that recent events have brought to light that “massive risks in derivatives markets have gone undetected by both regulators and market participants” and that, even if such risks had been more transparent, “regulators lacked the proper authorities to mount an effective policy response” to combat those risks.

The objectives of the Reform Framework are numerous. A primary objective is to contain systemic risk by amending the Commodity Exchange Act and federal securities laws to require the clearing of all standardized OTC derivatives through fully-regulated central clearing counterparties (“CCPs”) which would impose robust margin requirements on parties. Concern has been raised over whether clearance through CCPs could be substantially avoided the design of customized OTC derivatives. The Reform Framework further proposes to contain systemic risk by subjecting OTC derivatives dealers (and other firms whose activities create large exposures to their counterparties on OTC derivatives transactions) to a robust supervisory and regulatory regime, including conservative capital requirements, business conduct standards, reporting requirements and initial margin requirements.

The Reform Framework is also designed to promote efficiency and transparency within the OTC derivatives markets by ensuring that regulators have comprehensive and timely information about the positions of each market participant. The Treasury Department accordingly recommends amending existing laws to, among other things, require trades not cleared through CCPs to be reported to a regulated trade repository. The Reform Framework also proposes that existing laws be amended to ensure that regulatory authorities have clear and unimpeded authority to police fraud, market manipulation and other market abuses. Finally, the Reform Framework proposes that additional disclosure requirements or standards of care be imposed with respect to the marketing of OTC derivatives to less sophisticated parties, such as small municipalities.

The International Swaps and Derivatives Association, Inc. (“ISDA”), the primary OTC derivatives industry group, issued a statement welcoming the Reform Framework, calling it “an important step toward much-needed reform of financial industry regulation.”