As posted last night on Compliance Avenue, Senator Christopher Dodd unveiled a financial regulatory reform bill Monday.  This 1336 page bill proposed what some have called the “most sweeping overhaul of financial regulation since the depression,” and included a provision that would require advisers to private funds with more than $100 million in AUM to register with the SEC as investment advisers. Two other areas of the bill are of particular import to hedge funds and hedge fund managers: (1) the regulation of over-the-counter derivatives markets; and (2) the inclusion of  the “Volcker Rule” (For a full report on the bill see the Wall Street Journal.)

1. Regulation of Over-the-Counter Derivatives Markets.

The current bill represents little change from the November draft.  But, Senators Jack Reed and Judd Gregg are working on a substitute amendment to this title that may be offered at full committee.  As currently written, the over-the-counter derivatives market will be regulated by the SEC and the CFTC.  The bill also requires central clearing and exchange trading for derivatives that can be cleared.  The SEC and the CFTC must pre-approve contracts before clearing houses can clear them but, both regulators and clearing houses will have a role in determining which contracts should be cleared.

The bill has also added safeguards for un-cleared trades.   Any un-cleared trades will require margin to offset the greater risk such trades pose.  In addition, swap dealers and major swap participants will be subject to capital requirements.

Finally, the bill aims to increase market transparency by requiring data collection and publication through clearing houses or swap repositories.

2. Volcker Rule.

The bill would implement a form of the “Volcker Rule,” named after former Fed Chairman Paul Volcker.  Specifically, the bill would require regulators to implement regulations to prohibit banks, their affiliates and bank holding companies, from proprietary trading.   The regulations would also prohibit such institutions from investing in, or sponsoring, hedge funds and private equity funds.  Notably, before any regulations are written, the bill calls for a study and recommendations to made by the Financial Stability Oversight Council.

The New York Times reports that Sen. Dodd hopes to begin holding votes in committee starting next week, and to have the legislation on the Senate floor by late April.