The Obama administration in the US has laid out the framework for a new and improved regulatory regime for the financial system.

The framework is intended to close regulatory gaps exposed by the current crisis and limit opportunities for regulatory arbitrage, while establishing closer supervision of systemically important firms and strengthening the capital and liquidity requirements for financial institutions generally.

Institutions identified as Tier 1 Financial Holding Companies (FHCs) - based on their size, leverage and interconnectedness - may include bank holding companies, insurance companies and other types of financial institutions and will be subject to stricter capital and liquidity standards than other bank holding companies.

The Securities and Exchange Commission's (SEC's) will have increased power to regulate hedge funds. Under the proposals, hedge funds will have to register with the SEC and report on their assets in order to assess risks to financial stability. The SEC will also continue to work on tightening regulation of credit agencies.

The new framework also proposes that sponsors retain 5% of the credit risk of securitised exposure, and that the use of credit ratings in regulations and supervisory practices is limited wherever possible.

To reduce systemic and counterparty risks posed by OTC derivative products, the new framework includes stronger reporting requirements for OTC derivatives, central clearing, execution on exchanges or other 'transparent trading venues' and higher capital charges for customised OTC derivatives.

Foreign firms with US operations are likely to be made subject to the same regulation and oversight as US firms that pose risks to the US financial system under the proposals. The plan calls on the Basel Committee on Banking Supervision to develop a simple, non-risk based capital measure to limit leverage in the international financial system.

Robert Pickel, chief executive of the International Swaps and Derivatives Association (ISDA) today issued the following statement from Officer in respect of the Obama Administration's proposals for financial services regulatory reform:

"ISDA applauds the Administration's goal to modernize and enhance the regulatory structure for the broader financial services landscape, and supports the proposal's key objectives.

"... these regulatory proposals acknowledge the benefits of privately negotiated derivatives, and will continue to enable companies to use these risk mitigation tools to manage their risks."