Regulators Propose Capital Rules for Derivatives Trading

Federal authorities moved a step closer to overhauling the derivatives market on Wednesday, as regulators proposed tougher standards for the nation's biggest banks.

Firms like Goldman Sachs and JPMorgan Chase would have to bolster their capital cushion and post additional collateral for certain derivatives trades. The Securities and Exchange Commission proposed the crackdown as part of a broader effort to rein in the opaque derivatives business, a main player in the financial crisis.

“Together, these rules are intended to make the financial system safer, and the derivative markets fairer, more efficient, and more transparent,” Mary L. Schapiro, the agency's chairwoman, said in a statement.

Ms. Schapiro and the agency's commissioners voted unanimously, 5-0, to advance the plan. It now enters a 60-day public comment period, after which the S.E.C. and other federal regulators must finalize the rules.

The effort was part of the Dodd-Frank Act, the f inancial regulatory law passed in response to the financial crisis. The law mandated an overhaul of swaps trading by requiring that many such derivatives contracts go through a regulated clearinghouse that serves as a backstop in case one trading party defaults. Regulators, until recently, had little authority to set any rules for this market.

The vote on Wednesday, Ms. Schapiro said, signaled that the S.E.C. had turned the corner in the derivatives overhaul. The agency has proposed or adopted nearly the entire “regulatory regime for derivatives.”

The S.E.C., which has more Dodd-Frank duties than any other Wall Street watchdog, fell behind its fellow regulators in changing the regulations for swaps. The Commodity Futures Trading Commission and banking regulators proposed similar versions of the capital rules more than a year ago.

The rules take aim at one of the great calamities of the 2008 financial crisis. In the lead-up to the crisis, banks bought bi llions of dollars in credit default swaps as protection on mortgage-backed investments. When the investments soured, the American International Group and other insurance companies that churned out swaps contracts lacked the capital to honor their agreements.

Under the S.E.C.'s plan, banks and other so-called swaps dealers that arrange derivatives contracts would face a fixed-dollar capital threshold. The firms would also set aside a ratio equal to 8 percent of the collateral required for swaps contracts. The rules, Ms. Schapiro said, emphasize that swap dealers must hold liquid assets “readily available in times of crisis.”

The rules separately require banks to post margin, or collateral, for riskier swaps that do not go through clearinghouses. The banks would use a complex calculation to collect cash or securities from their trading partners.

Luis A. Aguilar, a Democratic commissioner, praised the effort.

“We are considering these rules becaus e a grave financial crisis,” he said, adding that the crisis “imposed immense costs on the American economy, with tragic effects on American workers and families.”