Nick Snow
OGJ Washington Editor
WASHINGTON, DC, Oct. 16 -- The US House Financial Services Committee approved a bill on Oct. 15 that would regulate over-the-counter trades in commodity markets for some—but not all—participants. Energy producers and consumers using commodity hedges to control prices apparently would be exempt.
The exemption was part of a manager’s amendment offered by the committee’s chairman, Barney Frank (D-Mass.), which clarifies that the bill’s marginal requirements would allow use of noncash collateral for commodity hedges. Independent producers have said that this is essential so they can continue using their reserves instead of cash. Airlines and other commercial fuel customers also support an exemption.
The administration of US President Barack Obama indicated earlier in the week that it could support an exemption for such commercial commodities traders after initially opposing it. Top officials at the US Commodity Futures Trading Commission and the US Securities and Exchange Commission, which would be jointly responsible for enforcing any new OTC commodities regulations, apparently remain uncomfortable with it.
One committee member said the provision is a step in the right direction because it addresses a lot of end-users’ concerns. “Still, the language still is unclear in that regulators can still require them to meet the cash requirement,” observed Scott Garrett (R-NJ). The committee adopted Frank’s amendment by voice vote.
The bill, HR 3795, passed by 43 to 26 votes, largely along party lines. It is aimed primarily at swaps, which are contracts that call for an exchange of cash between two counterparties based on an underlying rate, index, credit event, or the performance of an asset, according to information provided by the committee’s majority staff.
Major participants
Trades between dealers and major market participants would have to be cleared on regulated exchanges or electronic trading platform if the measure becomes law. The bill defined a major market participant as a person or entity which maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or which has a position creating such significant exposure to others that it requires monitoring.
Regulatory authority would be split between CFTC, which has jurisdiction over swaps, and SEC, which regulates securities-based swaps. The US Treasury would have authority to issue final rules if CFTC and SEC were unable to decide on a joint approach within 180 days. The two commissions would have to jointly approve subsequent interpretations of rules.
Frank said leaders from his committee will try to help resolve such questions later in meetings with the House Agriculture Committee, which plans to consider its own commodities reform bill on Oct. 21. Its chairman, Collin C. Peterson (D-Minn.), introduced a discussion draft on Oct. 9 which addressed OTC clearing, trading, capital and margin requirements, and position limits. The draft attempted to build on HR 997, an OTC regulatory bill which the committee passed earlier this year.
“We have been working throughout with the Agriculture Committee, which has jurisdiction over the CFTC. There are some issues which can’t be resolved by one committee, particularly when they are jurisdictional in nature. We will deal with them later,” said Frank. US Senate committees also are preparing commodities reform measures.
Positions had changed heading into the markup, Frank conceded. Paraphrasing Otto von Bismarck, chancellor of the German Empire during the late 19th century, the chairman said: “Watching sausage being made, and watching legislation being made, isn’t always attractive. There clearly has been a lot of give-and-take here. People who have been trying to fix the position of any one member at any given time have been mistaken because everyone has tried to work with an open mind.”
Other responses
Republicans on the committee remained critical. Spencer T. Bachus (Ala.), the ranking minority member, conceded following the vote that his three proposed amendments became part of the final bill. They would extend the implementation period of the legislation from 180 days to 270 days after enactment, provide SEC and CFTC with exemptive authority similar to current law; and perhaps most importantly, to prevent taxpayer funded bailouts of clearinghouses. All were adopted by voice vote.
But the bill still increases government regulation, Bachus continued. "One of the lessons from the crisis is that we need smarter regulation, not more regulation. We need to close the gaps in regulation, not add layer upon layer on existing legislation,” he said.
“The new system of complex regulation will place American businesses and the economy at a disadvantage,” Bachus said. "The committee has heard from companies that use derivatives to manage risk that the Democrats' legislation will drive up costs for the whole economy and could lead to capital restraints for users of derivatives. That is why Republicans offered amendments to ensure the legislation is workable and less disruptive to the economy. Unfortunately, in the end, overregulation trumped sound policy.”
CFTC Chairman Gary G. Gensler said following the vote that the House FS committee’s action “represents historic progress toward comprehensive regulatory reform of the over-the-counter derivatives marketplace,” adding, “The committee’s bill is a significant step toward lowering risk and promoting transparency.”
Significant challenges remain, he added. “I look forward to building on this committee’s hard work with Chairman Frank, Chairman Peterson, and others in the House and Senate to complete legislation that covers the entire marketplace without exception and to ensure that regulators have appropriate authorities to protect the public,” Gensler said.
Contact Nick Snow at [email protected].