CFTC, House chairman aim to fix swap reform law

WASHINGTON Wed Mar 3, 2010 5:03pm EST

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WASHINGTON (Reuters) - A central Congressional player in financial reform legislation on Wednesday said he is willing to close a potential loophole that might allow big derivatives traders to avoid public scrutiny of their deals.

"I don't want to let the financial guys off the hook," House Agriculture Committee Chairman Collin Peterson told reporters, acknowledging that the House version of the reform bill passed in December may be too lax.

It brought his position closer to that of Commodity Futures Trading Commission Chairman Gary Gensler, who has pushed lawmakers to weave a tighter regulatory net around the unregulated over-the-counter U.S. derivatives market that he has estimated at $300 trillion.

Gensler, testifying before a House agriculture subcommittee on Wednesday, said the House financial reform bill is strong, but might still let some large institutional traders escape a requirement to trade standardized derivatives on exchanges and clear those trades.

Large insurance companies, hedge funds, mortgage financing companies, leasing companies and others could take advantage of an "end-user exemption" which was intended to let players like utilities, airlines, manufacturers and oil producers use derivatives to hedge their risks.

"It may be that two years from now, clever lawyering will say, they're out," Gensler said in an exchange with Peterson. "I think that's unintended."

Peterson asked Gensler to suggest a remedy for the bill. He said the issue could be raised when House and Senate negotiators write a final version of swaps reform.

"I'm going to investigate this some more, whether there is a possibility they could get around this," Peterson told reporters. "If there is, we should tighten it up."

The exchange comes as two Senate committees work on companion bills. Lawmakers aim to finish the legislation by late summer.

The Senate Banking Committee could release its draft within days. Its work has been complicated by an Obama administration proposal to ban proprietary trading by banks.

The Senate Agriculture Committee plans to unveil its draft just before the March 26 to April 12 Easter break, at the earliest, and refine it afterwards, a spokeswoman said on Wednesday.

The House bill generally followed the Obama administration's outline for swaps reform -- requiring trading on exchanges and clearing of standardized derivatives.

But the Senate has been lobbied hard for less comprehensive rules.

It was the third consecutive day Gensler had pressed for tighter rules on exemptions. He told lawmakers on Wednesday that senators were divided on how wide the end-user exemption should be, and whether trading of derivatives on exchanges or other transparent forums should be mandated.

"That's been quite a flashpoint in the debate on the (Senate) side," Gensler said.

"EDDIE MURPHY RULE" ALSO PUSHED

The CFTC also stepped up efforts to convince Congress to include in its overall reform package tougher securities-style firewalls and insider trading bans for commodity and energy markets, first proposed by the CFTC and Securities and Exchange Commission in October.

The House bill included new requirements for firewalls within commodity trading firms, similar to those in place for securities dealers, Gensler said in written testimony.

"Without parallel protection in the futures markets, trading desks could use information developed by research arms before that information is shared with the firm's clients, raising serious questions about the integrity of the firm's services to its clients and confidence in the markets," he said.

The CFTC is calling its insider trading ban the "Eddie Murphy rule" after the actor's role in the movie "Trading Places," in which traders tried to profit from a stolen Agriculture Department report on the U.S. orange crop.

"We will provide language to the Senate as they consider financial regulatory reform legislation," Gensler said.

Traders are concerned about the CFTC's new proposals because those involved in buying and selling the cash products underlying futures trade naturally have insider information about market fundamentals.

But Gensler told reporters the new ban would apply strictly to misappropriated government information.

(Additional reporting by Christopher Doering; Editing by Alden Bentley, Rebekah Kebede and Lisa Shumaker)

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