WASHINGTON (Reuters) - The financial overhaul bill would not impose margin and capital requirements on swap end-users, senior Democrats said on Wednesday, accusing Wall Street firms of trying to frighten Main Street businesses.
At issue is a provision of the bill that would force big players in the $615 trillion over-the-counter derivatives market to front more in good-faith deposits to back up their dealings in these financial contracts, including swaps.
End-users of OTC derivatives — ranging from airlines to agribusinesses hedging the risks of running their businesses — would not face these same higher capital and margin requirements, said Representative Collin Peterson.
“Nowhere in this section do we give regulators any authority to impose capital and margin requirements on end users,” said Peterson, a Democrat, in debate on the House floor on the sweeping reform bill ahead of a final vote.
“What is going on here is that the Wall Street firms want to get out of the margin requirements, and they are playing on the fears of the end-users in order to obtain an exemption for themselves,” Peterson said.
Senator Saxby Chambliss on Tuesday said that a mistake in the bill could burden commercial end-users with substantial additional capital margin and costs. He is the top Republican on the Senate Agriculture Committee. Peterson is chairman of the House Agriculture Committee.
Chambliss offered an amendment to the bill that was aimed at ensuring end-users would not face indirect costs of a new margin requirement.
The amendment was rejected by senators on a joint Senate-House conference committee that finalized the bill.
On Wednesday, Republican Representative Frank Lucas said on the House floor that a recent study indicated U.S. companies could face $1 trillion in costs from new “capital and liquidity requirements” due to changes in the bill.
The study was issued on Tuesday by the International Swaps and Derivatives Association, a lobbying group for major dealers and participants in the OTC derivatives market.
The group’s officers and directors include senior executives of JPMorgan Chase, Morgan Stanley, Citigroup, Goldman Sachs, Bank of America and other firms, including major hedge funds.
FRANK: NO END-USER MARGIN REQUIREMENTS
But conference committee Chairman Barney Frank said: “The margin requirements are not on end-users.”
Swaps and OTC derivatives are contracts that allow users to hedge against the risks of movements in interest rates, energy prices, currency exchange and other business factors.
The bill would impose regulation for the first time on OTC derivatives, rerouting much of the market through more accountable and transparent channels, such as exchanges, electronic trading platforms and central clearinghouses.
Banks would also have to spin off the riskiest of their swap-clearing desk operations, but could keep many swaps in-house, including derivatives to hedge their own risks, under rules drafted by Democratic Senator Blanche Lincoln.
The OTC derivatives market — especially credit default swaps like those that dragged down former insurance giant AIG — were widely blamed for aggravating the 2007-2009 financial crisis. The reform bill aims to prevent a repeat of that crisis, which dragged the economy into a deep recession.
Reporting by Kevin Drawbaugh; Editing by Kenneth Barry