Long favoured by IP lawyers, who face ongoing challenges in document management, legal process outsourcing (LPO) has been cited as an effective means of tackling the potential rise in compliance work, if the US Administration’s proposed legislation for regulating over-the-counter (OTC) derivatives passes.
The proposed legislation, delivered to Capitol Hill on 11 August, draws from plans outlined in the Obama team’s white paper of 17 June, entitled Financial Regulatory Reform: A New Foundation, which sets out a series of measures for OTC derivatives that have been touted as pioneering.
‘Under the Administration's legislation,’ announced the US Treasury, ‘the OTC derivative markets will be comprehensively regulated for the first time. The legislation will provide for regulation and transparency for all OTC derivative transactions.’ The Treasury adds that OTC dealers and other stakeholders in the market will have to conduct their business with greater care in a climate of improved regulation and enforcement.
An article published in the National Law Journal has suggested that, if the legislation passes, the amount of compliance-related paperwork it will generate would provide LPO companies with significantly increased workflow. The legislation would require dealers to provide detailed information on their OTC trades, and they will need to produce a range of new documents to prove that they are acting within the law. Managing those documents is likely to require LPO support, predicts the journal, if in-house legal teams of financial institutions are to handle the work cost-effectively.
Debates around regulation of the OTC market have centred on the difficulty of knowing exactly how to regulate it. One of the key governance problems that OTC derivatives have posed is that they are bought and sold privately between parties, through brokers that work solely in that field. As such, the transactions do not show up on the radar screens of conventional stock exchanges.
As part of the proposed legislation, credit default swap markets and all other OTC derivative trades will be subject to rules designed to prevent their activities from posing excessive risk to the wider financial system. The Administration hopes that the legislation will promote transparency and efficiency, prevent market manipulation – such as inside trading and other market abuses – and block OTC derivatives from being marketed to unsophisticated parties.
The legislation’s demands for improved reporting and recordkeeping would prompt a rapid surge in the volume of data accessible to regulators. As these rules would be applied to a sector new to close inspection, financial groups will be eager to provide the data required to demonstrate their transparency.
The legislation awaits debate in Congress.
