ISDA has commented on the discussion draft, 'Restoring American Financial Stability', proposed by senate committee on banking, housing and urban affairs chair Chris Dodd.

Robert Pickel, executive director and ceo of ISDA, says: "ISDA and the industry recognise the need to improve the regulatory framework to modernise and protect the integrity of the financial system."

He believes the market consensus includes four initiatives: appropriate regulation for all financial institutions that may pose a systemic risk to the financial system; stronger counterparty risk management (including clearinghouses); improved transparency; and strong, resilient operational infrastructure. However, while significant progress is being made around these initiatives, ISDA and the industry remain concerned about key aspects of the legislative proposals that have been introduced.

Pickel stresses: "Preserving flexibility to tailor solutions to meet the needs of customers is essential. Efforts to mandate that privately negotiated derivatives business trade only on an exchange would reduce their availability."

He adds: "Banning naked shorting via CDS would adversely impact the credit markets. Cross-border regulatory coordination on these matters is imperative."

According to lawyers at Dewey & LeBoeuf, the draft combines many of the proposals originally made by the Obama Administration, but frequently changes their force or emphasis. "In the course of this bill-drafting process, Congress appears to be gradually creating a more general system of financial regulation, changing in potentially fundamental ways the basic orientation of regulation in the US from one focused on a specific industry or product to one concerned with the effects and importance of financial activities and products in general, regardless of their history or specific characterisation," they note. "In the draft, this change manifests itself in the near omnipresence of the defined term 'financial company' and its variants and in the generality of the proposed remedies."

For example, in certain portions of the draft, the word 'company' alone (without the modifier 'financial' and without appearing in the defined form of 'financial company') plays a significant role, at least in circumstances in which the entity being subjected to regulation engages in significant financial activity. To accommodate institutions whose activities might be dramatically affected by an abrupt implementation of more general financial regulation, the draft also creates an unusual transitional or grandfathering mechanism, the Dewey & LeBoeuf lawyers note.