Following deals and compromises that ended only shortly before the hearing began, the House Agriculture Committee has passed HR 3795 — more commonly known as the “derivatives oversight” legislation —by a bipartisan voice vote.
“This is the third time we’ve moved on this legislation,” said Rep. Colin Peterson of Minnesota, chairman of the committee, at the outset of the hearing. “This builds on the bill we passed in February, HR 977.
“We’ve made significant improvements, incorporated ideas from the (Obama) administration, and from a lot of other folks we’ve talked to. We have a bill here that will bring all these dark markets into regulation and transparency and preclude the kind of problems we’ve had in the financial system from happening in the future.”
The committee’s action, said Oklahoma’s Frank Lucas, ranking member of the committee, “is the next part of the process — most assuredly not the final step — in bringing a regulatory structure to an unregulated market. … Let’s finish this today so we can move to the next step and, ultimately, come up with a good piece of legislation that can be signed into law.”
To see the bill click here.
While the legislation strengthens regulation of derivatives — an industry worth nearly $450 trillion — that are often pointed to as a chief villain in the current financial crisis, Peterson is sure to face criticism for exempting some of the transactions from tough scrutiny he’d promised in earlier hearings. By doing so, Peterson bucked the Obama administration and many in his own party who wanted all over-the-counter (OTC) derivatives to be under federal regulation, to pass through a clearinghouse or be traded on exchanges to ensure terms are public.
If the legislation is passed into law, transactions with “end users” — including airlines, manufacturers and utilities — would be exempt from clearing and terms allowed to remain in the shadows. End-users, said Peterson, weren’t responsible for the current financial situation, hadn’t been given federal bail-out funds and thus shouldn’t be held to the most rigorous oversight standards.
Peterson also insisted the exemptions wouldn’t apply to the vast majority of deals and were not loopholes financial market-players could exploit. To further shore up the market’s safety, the legislation calls for customized contracts to maintain higher margin and capital requirements than cleared swaps.
A statement from the House Agriculture Committee says the bill “institutes a clearing and trading requirement for all OTC swap transactions between dealers and large market participants that are accepted by a clearinghouse. Non-cleared swaps must be reported, with major participants and dealers adhering to strengthened capital and margin requirements. The bill exempts commercial end users who use derivatives markets to hedge their price risk from the clearing requirement.
“The bill also contains provisions from H.R. 977, passed by the House Agriculture Committee in February, including the strengthening of position limits on futures contracts for physically-deliverable and OTC commodities as a way to prevent potential price distortions caused by excessive speculative trading.”
The bill, in the works for over two years, provides “clearing and exchange trading requirements, along with strong position limits provisions, (that) will increase transparency in the marketplace,” said Peterson. It “will benefit end-users by not submitting them to onerous cash collateral requirements, and will hold swap dealers and major swap participants to new standards for capital, margin, business conduct and other requirements to reduce their ability to again place our financial system in such dire straits.”
According to the statement, provisions included in the bill would:
• Institute a clearing requirement for swaps and security-based swaps, with derivatives clearing organizations determining which swaps must be cleared.
• Provide for exceptions from the clearing requirement for commercial end users who are not swap dealers or major swap participants.
• Hold swaps dealers and major swap participants accountable through margin, capital, business, and other conduct requirements.
• Require cleared, listed swaps to be traded on regulated exchanges.
• Require reporting and public disclosure of swap transactions.
• Allow the Commodities Futures Trading Commission (CFTC) to impose position limits on swaps and Securities and Exchange Commission (SEC) to impose position limits on security-based swaps.
• Provide for exclusive jurisdiction of swaps products under the CFTC, with security-based swaps products under the exclusive jurisdiction of the SEC.
• Call for the CFTC and SEC consultation in rulemaking regarding swap and security-based swap provisions.
• Require the CFTC to set trading limits for physically-deliverable commodities, in order to prevent excessive speculation.