NGSA, AXPC warn House on mandatory clearing of OTC derivatives

US House floor action to reform over-the-counter derivatives markets could increase commercial hedging and risk-management costs enormously unless it includes language specifically excluding these activities, two oil and gas association executives warned.

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Dec. 9 -- US House floor action to reform over-the-counter derivatives markets could increase commercial hedging and risk-management costs enormously unless it includes language specifically excluding these activities, two oil and gas association executives warned.

Mandatory clearing of all OTC derivatives could remove as much as $900 billion from a fragile US economy, the presidents of the Natural Gas Supply Association and the American Exploration & Production Council said in a Dec. 4 letter to US House Speaker Nancy Pelosi (D-Calif.) and the Agriculture, Energy and Commerce, and Financial Services committees’ chairmen and ranking minority members.

“Mandating centralized clearing and margins is a recipe for unintended negative economic consequences,” NGSA Pres. R. Skip Horvath said in a separate statement. “If all estimated hedging transactions are forced into clearing, it could either cost the US economy an estimated $900 billion—the price tag of the entire 2009 economic stimulus package and then some—or force many companies to scale back their hedging, exposing customers to increased commodity and financial risk,” Horvath said.

He added, “It would cost the energy industry alone tens of billions of dollars, effectively drive smaller participants out of the market and centralize risk, all at a time when dollars are instead needed to create energy jobs, build infrastructure, and meet environmental goals. That’s the exact opposite of the effect that policymakers intend and couldn’t come at a worse time for the struggling economy.”

An OTC derivatives regulation provision is part of a financial reform bill sponsored by Financial Services Committee Chairman Barney Frank (D-Mass.) that the House was scheduled to consider on Dec. 9.

In their letter, Horvath and AXPC Pres. Bruce Thompson said there needed to be an exemption for energy derivatives used for hedging. Without a clear exclusion, physical natural gas supply agreements risk being defined as swaps and included in a clearing mandate, they indicated.

“Mandatory clearing is too high a price for energy derivatives transactions that do not contribute to systemic risk,” Horvath maintained.

Contact Nick Snow at nicks@pennwell.com.

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