With the battle over healthcare finally behind it, Congress is moving forward with its plan to implement financial reform legislation, including regulation of the derivatives industry. Sen. Chris Dodd (D-CT) has spearheaded the most recent round of discussion in this area, proposing a revamped financial regulatory reform bill on March 15, 2010 (Dodd Bill). The release of the Dodd Bill followed weeks of intense negotiation with both Democratic and Republican senators, as members of both parties attempted to create a bipartisan draft of the proposed bill. Bipartisan efforts ultimately failed, and Sen. Dodd pressed forward with his own bill in hopes of bringing it to the Senate Floor at the end of April. Notably absent from the Dodd Bill were any significant changes to Sen. Dodd’s prior legislative proposal for the regulation of derivatives. As a result, market participants are now shifting their focus to the Senate Agriculture Committee’s long-awaited version of derivatives legislation, which many expect to contain the final terms of a bipartisan bill in the Senate.

The Dodd Bill continues the debate over various legislative proposals aimed at reforming the financial system that could dramatically change the way the over-the-counter (OTC) derivatives industry operates. These proposals, if enacted, will initiate a new regulatory regime to govern OTC transactions, which have been lightly regulated in the past. Notably, each of the proposals contemplates new registration, capital, disclosure and reporting requirements for OTC dealers; a new category of regulated entity “Major Swap Participants” subject to regulation akin to that to be imposed on OTC dealers; required clearing, including margin requirements for most OTC transactions; and the imposition of new position limits on both exchange-traded and certain OTC swaps. The most viable legislative proposals, including Sen. Dodd’s prior bill, the Restoring American Financial Stability Act of 2009 (Prior Dodd Bill) and H.R. 4173 were summarized and compared in our January 7, 2010, Legal Alert.