CQ: House Panel Approves Financial Overhaul Bill With End User Exemption

The House Agriculture Committee on Wednesday approved legislation designed to bolster oversight of financial derivatives after retreating from imposing tougher rules on some businesses that use derivatives to manage risk.

By voice vote, the panel approved an amended version of the bill (HR 3795) approved Oct. 15 by the Financial Services Committee. The two panels share jurisdiction over the derivatives market.
Under both panels’ versions of the bill, end users — companies that use derivatives as a kind of insurance to hedge against such risks as fuel price spikes and interest rate fluctuations — would be exempt from new requirements on financial institutions.

The legislation would require institutions dealing in over-the-counter derivatives to register with federal regulators; meet new requirements for record-keeping, reporting and capital standards; and maintain adequate margins, or collateral. The bill also aims to force many derivatives through a third-party clearinghouse that would guarantee that both sides of a contract make good on the deal.
In an earlier discussion draft, committee Chairman Collin C. Peterson, D-Minn., had included language that would have required end users engaging in transactions with major “Tier One” financial institutions, such as Goldman Sachs, to follow the new regulations.

That requirement was dropped in a manager’s amendment the panel approved Wednesday. Committee members said it would be unfair to impose the higher collateral requirements on end users simply because they transacted deals with the too-big-to-fail players that are the main target of the legislation.

“The end users were worried they’d have to put higher margins, maybe cash,” Peterson said.

He said the big institutions would not escape scrutiny by engaging in transactions with smaller end users because they would still have to meet higher margin requirements and go through a clearinghouse.
Peterson said he drew the Tier One language from the Obama administration’s proposed financial market overhaul, but dropped it because he was satisfied there was sufficient oversight of big players without it and there was no need to penalize end users that were not responsible for past abuses.

“We have sufficient regulation in this bill without that,” he said.

He said that he got pushback from both Democrats and Republicans on his panel and that if he hadn’t dropped the provision, members would have taken it out.

Michael Greenberger, a University of Maryland law professor and former director of the Division of Trading and Markets at the Commodity Futures Trading Commission, said the decision not to include the Tier One language moves the Agriculture Committee legislation closer to the Financial Services version.

Greenberger, who was not at the committee markup, said he did not think this was a good development.

“The Peterson bill has removed whatever strengths it had,” he said. “Both bills have been cleverly watered down.”

Risky Speculation

Introducing oversight, for the first time, of the huge market in over-the-counter derivatives — those not traded on public exchanges — is a core component of attempts to correct the weaknesses in the financial regulatory system that came to light with last year’s Wall Street meltdown.

Billions of dollars in risky derivatives investments brought down the insurance giant American International Group Inc. and crippled the banking industry when the value of underlying mortgages collapsed.
The collapse exposed the enormous risk that many financial institutions were taking by speculating in derivatives without setting aside a sufficient capital cushion in case their gambles failed.
Frank D. Lucas of Oklahoma, the Agriculture Committee’s ranking Republican, also serves on the Financial Services Committee and voted against that panel’s version of the bill. But he said the Agriculture Committee version was a bipartisan product.

“It’s carefully crafted and could sail through the House,” he said.