WASHINGTON (Reuters) - The House Agriculture Committee approved a bill on Wednesday for federal regulation of over-the-counter derivatives -- an Obama administration goal -- that would require many swaps to go through clearinghouses.
Swaps that go through clearinghouses would be required to move onto regulated exchanges or electronic platforms. Clearing and on-exchange trading are intended to reduce market risk.
Transactions that involve “end users,” such as manufacturers, utilities and airlines, would be exempt from clearing.
It was the second approval in a week by a House committee of a bill to regulate the $450 trillion OTC derivatives market, widely blamed for amplifying last fall’s financial crisis.
The Agriculture Committee oversees the futures markets. A similar bill was approved on Thursday by the Financial Services Committee, which has jurisdiction over banks and equities.
Agriculture Committee chairman Collin Peterson estimated that 70-80 percent of OTC transactions would go though clearing under the bill. Customized contracts would face higher margin and capital requirements than swaps that are cleared.
The two legislative versions will be merged into an overall package of financial regulatory reforms for a House vote, expected by early November. The Senate has yet to write a bill. Financial reform is one of the top three priorities for Congress this year.
Peterson held out the possibility the swaps bill could go to a separate vote but said the decision was up to Democratic leaders.
While the administration proposed mandatory clearing and on-exchange trading for “standardized” OTC contracts, both of the House committees decided to exempt transactions involving end users from clearing. The businesses said they often pledge assets as collateral in their deals and do not have the cash they would have to post as margin at clearinghouses.
The Agriculture Committee bill revised the definition of major swap participants to exclude positions held to mitigate commercial risk and to include people whose outstanding swaps bring substantial risk exposure to the banking or financial system. Major swap participants and dealers are the subjects of most of the requirements of the bill.
Peterson initially proposed that transactions involving end users and Tier 1 financial institutions would have to go through clearing. That idea was dropped from the bill. Peterson said the original language came from the administration.
Frank Lucas, the Republican leader on the committee, said the two changes “make this bill much more end-user friendly and worthy of support.”
Also, the Agriculture Committee bill would require the Commodity Futures Trading Commission to set position limits on physically deliverable commodities, such as oil, and on swaps that affect futures prices. It also empowers the Securities and Exchange Commission to set position limits on security-based swaps. Regulators could allow exceptions to the limits on market share.
In a speech in Chicago, CFTC chairman Gary Gensler said “the worst financial crisis in 80 years demands the most comprehensive regulatory reform in generations.” He argued against an exemption for end users but if an exception is allowed, it should be limited to “nonfinancial entities that use swaps as an incidental part of their business to hedge actual commercial risks.”
In either case, he said, swaps that involve end users “should be traded on exchanges or swap execution facilities.”
“This will best promote the price discovery function of the markets,” said Gensler.
Reporting by Charles Abbott
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