As a result, new attention has been drawn to the regulation of derivatives markets—and particularly toward the unregulated over-the-counter (OTC) derivatives market, where transactions are not made on a public exchange market and where little information on trading and prices is available. What regulatory changes, if any, would reduce risks to the financial system from derivatives trading? A number of bills were introduced in the 111 th Congress, and several congressional committees held hearings. In the United States, major derivatives exchanges are regulated by the Commodity Futures Trading Commission (CFTC, which oversees the futures exchanges) and by the Securities and Exchange Commission (SEC, which regulates stock option markets). The OTC market, by contrast, was largely unregulated until the Dodd-Frank Act. Several aspects of derivative finance may be implicated:
Complexity. Whether derivatives markets tend to exacerbate volatility is an unresolved question. Derivatives Legislation in the 111th Congress

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( P.L. 111-203 ) enacted sweeping derivatives reforms. The provisions of Dodd-Frank are not summarized here, but are the subject of a separate CRS report—CRS Report R41398, The Dodd-Frank Wall Street Reform and Consumer Protection Act: Title VII, Derivatives , by [author name scrubbed] and [author name scrubbed]. In the OTC market, by contrast, a number of large financial intermediaries stand as dealers, who are willing to take the other side of their customers' trades. Any contracts exempted from the clearing requirement would still have to be reported to the CFTC. The bill would authorize federal regulators—the CFTC, the SEC, and the banking agencies—to exercise oversight over swaps entered into by financial institutions, persons, or other entities subject to their regulatory jurisdiction. The regulators are authorized (but not required) to impose disclosure, reporting, or recordkeeping requirements. Can traders avoid speculative position limits by trading on ICE, in addition to (or instead of) Nymex? Key elements of the plan include the following:
requiring that all standardized OTC derivatives are cleared through regulated central counterparties, and executed in regulated and transparent venues; increasing transparency in the OTC derivatives market, including developing a system for timely reporting of trades and prompt dissemination of prices and trading information; introducing reporting and record-keeping requirements on all OTC derivatives; preventing market manipulation, fraud and other abuses, including by amending the Commodities Exchange Act (CEA) and any securities laws to ensure the CFTC and SEC have clear authority to prevent and police market abuses; monitoring activities broadly in the OTC derivatives markets and ensuring they don't pose systemic risks to the financial system; strengthening regulation of OTC derivatives dealers and ensuring these products are not sold inappropriately to unsophisticated customers; bolstering the Federal Reserve's authority over derivatives markets infrastructure, such as clearing and settlement systems; and harmonizing the statutory and regulatory regimes for securities and futures. To make the OTC derivatives oversight regime more robust, the Administration also proposed the introduction of conservative capital requirements—namely, requirements more conservative than existing bank regulatory capital requirements for OTC derivatives—and also conservative requirements for initial margins on derivatives trades in order to hedge counterparty credit exposures in those trades.
In the wake of the financial crisis and unusual oil price volatility, new attention was drawn to the regulation of derivatives—and particularly toward the unregulated over-the-counter (OTC) derivatives market. What regulatory changes, if any, would reduce risks to the financial system from derivatives trading? A number of bills were introduced in the 111th Congress, and several congressional committees have held hearings. The Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) enacted a sweeping reform of derivatives trading and oversight and brought the unregulated OTC swaps market under the jurisdiction of federal regulators.
The 111th Congress proposals for reform ran the gamut from requiring all derivatives trading to occur on regulated exchanges—essentially shutting down the unregulated OTC market that exists today—to permitting OTC trading to continue, but with more disclosure and oversight. Some participants in the OTC markets have noted that the lack of transparency is in and of itself an attraction, allowing them to take large speculative positions without other market participants being aware of their identities or trading positions. In the crisis, however, this lack of transparency appears to have exacerbated fears about potential losses faced by financial institutions and made banks less willing to lend. Dodd-Frank requires that all OTC derivatives be reported to swap data repositories, and that key market information be made public.
Before Dodd-Frank, various derivative products were subject to different legal frameworks. The Commodity Futures Trading Commission (CFTC) was the lead federal agency, but the Securities and Exchange Commission (SEC), the Federal Reserve, and other banking regulators also had jurisdictional claims. Under Dodd-Frank, this regulatory complexity continues, with the SEC given jurisdiction over most security-based swaps, the CFTC regulating other swaps, and the other regulators in a variety of consulting roles.
A key OTC market reform is to mandate the use of central counterparties (CCPs)—or clearinghouses—to process derivatives trades and thereby hopefully reduce risk and increase transparency. (Such clearinghouses have long been a standard feature of the regulated futures exchanges.) The Dodd-Frank Act included an exemption from the clearing requirement for nonfinancial end-users, who use derivatives to hedge the commercial risks of their businesses.
Additional proposals focused on new record-keeping or reporting requirements for OTC trades; audit trails; position limits; large trader reporting requirements; and increasing regulatory oversight of trading. An additional important question, for which Congress's tools may be limited, is how to ensure regulatory harmonization with other international markets, so as to avoid a "race to the bottom" in derivatives regulation.
The Dodd-Frank derivatives provisions are summarized in CRS Report R41398, The Dodd-Frank Wall Street Reform and Consumer Protection Act: Title VII, Derivatives, by [author name scrubbed] and [author name scrubbed], and current legislation is discussed in CRS Report R42129, Derivatives Legislation in the 112th Congress, by [author name scrubbed].
This report summarizes other derivatives legislation that was considered but not enacted by the 111th Congress, and it provides background on the derivatives market.