Financial regulatory reform: on the horizon.

• Author: Roberts, Tyler
• Position: Washington insights

While health-care reform dominates headlines in the United States Congress, financial regulatory reform is poised to become a major issue on the legislative calendar into next year. President Barack Obama and the Democratic Congressional leadership have signaled that reforming the nation's financial system is a top priority and they've been working over the last several months to design and pass sweeping legislation.

There are many different parts to the reform and elected officials from both the House and Senate and the White House are looking to play an active role in transforming financial regulations.

The reforms being considered are related to regulating systemic risk, over-the-counter derivatives, private investment funds, federal insurance, investor protection, consumer financial protection and the regulation of credit rating agencies.

As a part of these proposals, Congress has been considering other minor proposals to amend the Sarbanes-Oxley Act of 2002, create a new accounting standards oversight board, create a "Shareholder's Bill of Rights" and potentially make further changes to executive compensation laws.

Several committees have jurisdiction over these reforms. However, Rep. Barney Frank (D-Mass.) in the House and Sen. Christopher Dodd (D-Conn.) in the Senate are the most influential reformers as chair of the House Financial Services Committee and the Senate Banking, Housing and Urban Affairs Committee, respectively.

While most of the reforms under consideration have potential to affect financial executives, two key proposals have received the most attention from financial executives: HR 3795, calling for the regulation of over-the-counter derivatives, and HR 3890, which deals with regulation of credit rating agencies (CRAs).

Democratic leadership's intent behind HR 3795 is to enhance oversight and transparency in the derivatives markets by moving more contracts onto exchanges and requiring contracts to be centrally cleared. In particular, financial executives would be interested in the impact to business end-users of derivatives.

As progress was made on the House bill this fall, members of Congress took great care to include a well-intended end-user exemption from mandatory exchange trading and central clearing. However, significant leeway is given regulators to decide who is a " major market participant," and what constitutes a "substantial net position" in derivatives, which could ultimately affect who must centrally clear...