ETF News

Key U.S. lawmakers reach deal on swaps regulation

WASHINGTON, Dec 2 (Reuters) - House Agriculture Committee Chairman Collin Peterson told Reuters on Wednesday he has reached an agreement with House Financial Services Committee Chairman Barney Frank on a bill to impose federal regulation for the first time on the over-the-counter derivatives market.

The bill was expected to come up for a vote on the House floor next week as part of a sweeping package of financial regulation reform proposals, said House aides.

Two issues will be decided on the floor -- whether to limit ownership in swaps clearinghouses, and whether regulators would have the power to set margin and capital requirements on swaps traded by nonfinancial end users.

The $450 trillion OTC derivatives market has been widely blamed for amplifying last year’s financial crisis. Lawmakers have been trying for months to balance a desire to curb speculative excess while preserving the market’s useful role in helping corporations hedge against operational risks.

“Our legislation brings tough new restrictions for the first time to the opaque, unregulated market,” Frank said in the text of remarks delivered to a meeting of House Democrats on Wednesday that was obtained by Reuters.

“Dealers and large market participants will face robust new regulation and never again will an organization such as AIG be able to amass a large, unsecured position in swaps that can threaten the stability of the financial system,” he said.

Cracking down on OTC derivatives is a central plank in the Obama administration's plan for tightening bank and capital market regulation after last year's financial crisis that led to massive taxpayer bailouts of firms such as AIG AIG.N.

The administration is under international pressure to advance financial reform. The G20 group of countries has agreed that OTC derivatives should trade on an exchange or platform, where appropriate, and clear centrally by the end of 2012.

Frank’s committee approved an OTC derivatives regulation bill on Oct. 16, while Peterson’s approved a separate measure on Oct. 21. Although similar, the two had some differences.


Aides said the committee chairmen have reconciled 90 percent of the two bills, but the end user and clearinghouse ownership issues still must be ironed out.

If a bill can be passed, the issue will shift to the Senate, where Banking Committee Chairman Christopher Dodd has introduced a bill and Agriculture Committee Chairman Blanche Lincoln is working on one of her own.

Debate in the Senate is expected to go on into 2010, not only on derivatives, but on other financial reforms as well.

OTC derivatives are financial contracts that trade off-exchange among the biggest financial institutions and so-called end users ranging from airlines to agribusiness.

A large slice of the market involves financial firms placing bets on changes in interest rates, debt defaults and prices for commodities or stocks. But many businesses use derivatives to hedge against risks that can affect their operations, such as changes in fuel and commodity prices.

President Barack Obama earlier this year proposed moving much OTC derivatives trading onto exchanges or equivalent electronic platforms to encourage transparency and accountability in a market beyond the grasp of regulators.

Goldman Sachs GS.N, JPMorgan Chase JPM.N, Citigroup C.N, Bank of America BAC.N and Morgan Stanley MS.N dominate the derivatives market and reap huge profits from it.

End users would not have to go through clearinghouses under the compromise bill hammered out by Peterson and Frank.

But standardized swaps would have to trade on regulated exchanges and electronic platforms. Higher margin and capital requirements would be set on customized swaps.

Dealers and major market participants would have to register and follow recordkeeping, reporting and business conduct rules, under the bill.

Clearinghouses would decide which swaps have a large enough volume to be accepted for clearing. The Securities and Exchange Commission and the Commodity Futures Trading Commission would have some authority to intervene if clearinghouses abuse their discretion and turn away standardized swaps. (Editing by Jan Paschal) ((; Tel: +1 202 898 8390; Fax: +1 202 488 3459 (fax)))