CFA Institute co-signed a letter to Congressional leaders on the OTC Derivatives Markets Act of 2009 with an investor's viewpoint recommending that standardized OTC derivatives should trade on regulated exchanges and clear centrally.

The recommendations for derivatives reform came from The Investors Working Group, a blue ribbon panel of industry and market experts created by the CFA Institute and the Council of institutional Investors to study and report on financial regulatory reform from the viewpoint of investors. The IWG considered the need to improve regulation of OTC derivatives which resulted in its July 2009 report U.S. Financial Regulatory Reform: The Investors' Perspective (IWG Report).

The other IWG recommendations are as follows:

--OTC trading in derivatives should be strictly limited and subject to robust federal regulation. The FASB and IASB should improve accounting for derivatives. The SEC and the CFTC should have primary regulatory responsibility for derivatives trading. The United States should lead a global effort to strengthen and harmonize derivatives regulation.

--The letter acknowledges that Congressional leaders will need to reconcile differences between the Over-the-Counter Derivatives Markets Act of 2009 from by the Committee on Financial Services chaired by Rep. Barney Frank and the Financial Services and the Derivatives Markets, Transparency and Accountability Act of 2009 from the Committee on Agriculture, headed by Rep. Collin G. Peterson.

--IWG points out that the global OTC derivatives market is enormous ($592 trillion in notional amount as of December 2008) and was exempted from virtually all federal oversight and regulation by the Commodity Futures Modernization act of 2000.

--Although OTC derivatives have been justified as vehicles for managing financial risk, they have also spread and multiplied throughout the economy in the current crisis, causing great financial harm, according to the IWG's findings. Problems plaguing the OTC derivatives market include lack of transparency and price discovery, excessive leverage, rampant speculation and lack of adequate prudential controls, according to IWG's findings.

The IWG's report is available in electronic format.