Climate bill would tighten U.S. derivatives rules

WASHINGTON Fri Jun 26, 2009 7:38pm EDT

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WASHINGTON (Reuters) - The climate-change bill passed by the U.S. House on Friday would expand federal regulations by banning "naked" credit default swaps and requiring over-the-counter derivatives to go through central clearinghouses.

It also directs the Commodity Futures Trading Commission to set position limits on energy traders across all markets and brings energy swaps under CFTC oversight. The CFTC is the futures market regulator.

Credit default swaps (CDS) were blamed for amplifying market turmoil last fall. The sharp decline in financial markets prompted proposals for broader federal regulation.

Some of the proposals in the climate bill, such as mandatory clearing of OTC derivatives, are part of the Obama administration proposal for financial regulatory reform. A bill pending in the House allows suspension of trading in "naked" credit default swaps, but would not ban them outright.

The climate bill would limit trading in CDS to people who also own the underlying security and could suffer loss on the instrument. A naked CDS is not connected to a credit instrument.

Central clearinghouses are regarded as a way to bring liquidity into markets and to make public the terms of trade. Clearinghouses guarantee payment of contracts and can require dealers to hold money in reserve to offset their risks.

While the bill calls for clearing of OTC derivatives, it allows waivers for rarely traded, customized derivatives.

Eighteen House Democrats suggested in a letter on June 17 that revisions for OTC rules should be reserved for an omnibus regulatory reform bill, rather than the climate bill. Senate leaders say they intend to draft such legislation this fall.

Most of the provisions in the climate bill appeared in recent bills in Congress aimed at controlling speculation in oil markets.

(Reporting by Charles Abbott; editing by Andre Grenon)

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