Congress Daily: Dems Coalesce Around Tougher Derivatives Provisions

Oct 15, 2009
In The News

The House Financial Services Committee is slated to approve legislation today that would place greater regulations on the over-the-counter derivatives market in a vote that showcases Democrats coalescing around an effort to place tough requirements on the financial industry despite aggressive lobbying by big banks.

The panel is expected to approve Financial Services Chairman Barney Frank’s bill to force more trades on the multitrillion-dollar OTC market — where customized trades take place between two parties with less regulation — onto exchanges and require greater capital standards to prevent a collapse such as the one at American International Group.

Frank revised his bill after it came under criticism, particularly from Commodity Futures Trading Commission Chairman Gary Gensler, that it contained too many loopholes. "I think Gensler is mostly satisfied," Frank said after his panel finished debating amendments to the measure. Frank noted that he called AFL-CIO Chairman Richard Trumka to reassure him that he was taking a tough stance on the issue after a labor-backed group strongly criticized his earlier version.

For example, Frank offered an amendment Wednesday that would mandate that trades between major financial players — such as banks and hedge funds — must be placed on exchanges. But trades by end-users such as airlines, manufacturers and farmers, which use them to hedge against business risk, would be exempt.

Frank did not include such a mandate for cleared swaps in his first draft, while an Obama administration proposal and a competing draft from House Agriculture Chairman Collin Peterson did. Gensler had argued that placing those trades on the exchanges would provide better transparency and pricing, though cut into the profit margins of the five big banks that dominate the OTC market.

"We do not believe mandating exchange trading is necessary. There is no reason for the government to mandate one particular transaction mode over another," said Cory Strupp of the Securities Industry and Financial Markets Association.

Despite the difference in the language, Assistant Treasury Secretary Michael Barr said Frank’s exemptions for end-users were reasonable and would continue to work on the language before it comes to the floor, most likely as part of an overall revamp of the nation’s financial regulatory system.

On another issue, Frank said he is moving closer to the Obama administration over a definition of a "major swap participant" that would come under greater scrutiny from the bill’s regulation. Gensler had criticized an earlier Frank draft that allowed exemptions for "risk management purposes."

Frank offered an amendment Wednesday that would designate firms as a major swap participant if they would expose their counterparties to significant losses. Frank would additionally give the SEC and CFTC more authority to exempt firms from falling under the definition.

It was approved on a voice vote.

"The administration urges a definition that would exclude few end-users. … They would have a narrower exclusion," said Frank, who added that he understood Peterson was moving closer to the administration’s language for a major swap participant. "I don’t think there are going to be huge differences."

The Agriculture Committee will mark up its bill Wednesday. Peterson said he expects a bipartisan vote in favor of the measure, in which banks and dealers face a greater obstacle in getting their language attached given that Peterson has held a skeptical view of Wall Street traders.

Agriculture ranking member Frank Lucas, who sits on Financial Services, said in an e-mail Wednesday, "It is fortunate that Agriculture Committee members will have a few days to evaluate the outcome of this markup before taking up the issue next week. There are still concerns from the end-user community and others with both the Frank and Peterson bills."

Peterson, who met with Gensler Wednesday, said he was pleased with the changes that Frank made because "he keeps picking up our provisions and putting them in his bill." He noted a provision in Frank’s proposal to allow end users of derivatives such as airlines, manufacturers and farmers to continue using the non-cash collateral for margin requirements. "The end users were not causing any problems," Peterson said.

Peterson said his bill would include language to curb speculation in the energy and agricultural markets that were contained in an earlier bill that his committee passed. Peterson said he expects that he would add a provision to give the CFTC authority to establish position limits for such markets.

Airlines, public utilities and farm groups have complained that commodities speculation by investors last year caused futures prices to skyrocket. They contend such speculation makes the futures markets unworkable for long-term market participants that depend on them for risk management and price discovery.

Barr said the administration financial services regulation proposal was silent on the speculation issue, but said administration officials are working with Peterson.

The two bills also differ over who would have the authority to mandate if swaps should go through a clearinghouse, which guarantees a trade and establishes capital requirements.

Under Frank’s bill, clearinghouses would be able to submit swaps to either the SEC or CFTC for approval and the regulators would then determine whether the swap should be cleared. Peterson’s draft would allow the clearinghouse to make the call regarding whether a trade should be considered standard and could be cleared.

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