The U.S. must build a foundation for a stronger financial system even as it continues to grapple with the most severe economic downturn in decades, Treasury Secretary Timothy Geithner and Director of the National Economic Council Lawrence Summers said in an op-ed in Monday’s Washington Post.

For a time, talk of financial-regulatory changes was one of the main focal points in Washington, though in recent days health-care reform has overshadowed it. Still, the Obama Administration is still pushing for some type of reform in the financial arena, even if it’s not as heady as creating a single regulator or some of the other ideas that had been suggested when the financial crisis was the focus of the moment.

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Geithner and Summers said in their op-ed that the Obama Administration would put forward a plan this week focusing on five key regulatory points, most of which have been previously reported in recent weeks:

--“Raising capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms.” In addition, the officials said, “all large, interconnected firms whose failure could threaten the stability of the system will be subject to consolidated supervision by the Federal Reserve, and we will establish a council of regulators with broader coordinating responsibility across the financial system.”

--Regulation of derivatives markets that will involve “robust reporting requirements on the issuers of asset-backed securities; reduce investors' and regulators' reliance on credit-rating agencies; and…  require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.” The op-ed said “all derivatives contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse.”

--Construction of “a stronger framework for consumer and investor protection across the board.”

--Creation of a “resolution mechanism that allows for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system.” They added,” this authority will be available only in extraordinary circumstances, but it will help ensure that the government is no longer forced to choose between bailouts and financial collapse.”

--“We will lead the effort to improve regulation and supervision around the world,” the officials said. “We live in a globalized world, and the actions we take here at home -- no matter how smart and sound -- will have little effect if we fail to raise international standards along with our own.”

According to people familiar with the thinking in Washington, the nature of insurance regulation is still a sticking point. Insurance companies are currently regulated at the state level, but there has been talk about adding some federal oversight as well.

Also, some of the details about the Federal Reserve's shared powers with the council of regulators still remain to be seen.

Geithner and Summers said the op-ed was only a small overview of the proposals the Administration would present, but that “now is the time to act” to bolster the U.S.’s financial system.

A person close to the final negotiations on the regulatory framework provided an outline of some of the points: 

Increases Market Transparency and Market Discipline

The Administration's plan will help increase confidence in the markets for mortgage- and other asset-backed securities by increasing transparency, promoting standardization, and expanding electronic reporting.

Increase The SEC's Authority To Require Robust Reporting And Disclosure By The Issuers Of Securities

Issuers of asset-backed securities will be required to disclose loan-level data as well as the nature and extent of broker, originator, and sponsor compensation for each securitization

Investors and credit rating agencies will have access to this information both at inception and over the life of the securitization.

Promote Standardized Contract Terms to Improve Market Discipline

Legal documentation for transactions will be more standardized to make it easier for market participants to accurately value the securitization.

Inclusion in Electronic Trade Reporting

The SEC and the Financial Industry Regulatory Authority will expand TRACE, the electronic trade reporting database currently used for corporate bonds, to include asset-backed securities.

Better Aligns Incentives

The compensation of brokers, originators, sponsors, underwriters, and others involved in the securitization process will be linked to long-term performance of the securitized loans -- and to the interests of borrowers and investors.

Require Loan Originators To Retain 5% Of The Credit Risk

Federal banking agencies will require that loan originators retain 5% of the credit risk of securitized exposures.

Loan originators will be prohibited from directly or indirectly hedging (or otherwise transferring) the risk they are required to retain under these regulations.

Recognition of Profit in Line with Performance

Generally Accepted Accounting Principles, or GAAP, will be changed to eliminate the immediate recognition of "gain on sale" by originators at the time of a securitization transaction and instead require originators to more accurately reflect income as the assets perform over time.

Broker Commissions Based on Long-Term Performance of Loans

Fees and commissions received by loan brokers and loan officers will be disbursed over time and reduced if a loan is not repaid because of poor underwriting. 

Strong and Standard Warranties

Sponsors of securitizations will be required to stand behind the securitized products sold to investors - in the form of strong, standardized representations and warranties regarding origination and underwriting practices of the underlying loans.

Increases Transparency On Credit Rating Agencies 

Credit rating agencies will be required to address conflicts of interest and better inform the public regarding the meaning and performance of ratings.

Address Conflicts of Interest

Credit rating agencies will be required to maintain robust policies and procedures for managing and disclosing conflicts of interest and ensuring the integrity of the rating process.

Provide Clarity on Ratings and Risk

Credit rating agencies will differentiate the ratings they assign to structured credit products (e.g asset-backed securities) from those they assign to unstructured debt (e.g. corporate bonds):

Credit rating agencies will publicly disclose what risks their ratings are designed to assess and will provide this information in a way that is easy to understand.

Agencies will be required to report on the credit rating performance measures for structured credit products to allow comparison across products and ratings and adequately displays the uncertainty and potential volatility associated with credit ratings. 

Increased Transparency on Methodology

Credit rating agencies will be required to publicly disclose additional information about the methodology used to rate structured finance products (e.g. asset-backed securities)

Credit rating agencies will be required to disclose non-public rating agency data and methodologies to the SEC.