House Panel Approves Measure Regulating Derivatives
By Dawn Kopecki
Oct. 15 (Bloomberg) -- The House Financial Service Committee approved legislation today to rein in the $592 trillion derivatives industry, after reworking several provisions regulators had criticized as too lax.
The measure, approved 43-26, was welcomed by officials at the Treasury Department and the Commodity Futures Trading Commission. They said it still lacked some elements sought by President Barack Obama’s administration.
The administration called in August for imposing higher capital and margin requirements on derivatives markets and requiring that certain contracts be processed through clearinghouses. Regulators had said the original draft of the legislation sponsored by Representative Barney Frank, chairman of the Financial Services panel, left “gaps.”
“Our view is this is a tough, strong piece of legislation,” Assistant Treasury Secretary Michael Barr told reporters on a conference call today. “There are elements that we proposed that are not in the Frank bill. Those are the kinds of things that we think ought to be looked at going forward.”
CFTC Chairman Gary Gensler said in a statement that the bill was a “significant step” toward lowering risk and increasing transparency in the marketplace. “Substantive challenges remained,” he said. Mary Schapiro, chairman of the Securities and Exchange Commission, called approval “a very important step forward.”
Barr and Gensler, who didn’t specify the changes they want made, said they plan to work with Congress to reinstate some of the administration’s ideas. The measure approved today must be reconciled with similar bills pending in the House Agriculture and Senate Banking committees.
Broker Dealers
Frank’s panel today adopted an amendment, called “essential” by Barr, that would require broker dealers such as JPMorgan Chase & Co. and the Goldman Sachs Group, and their biggest customers, to trade and clear most derivatives contracts on regulated exchanges or swap-execution facilities.
It exempts from those requirements most “end-users,” companies that employ derivatives to hedge their operational risks, such as rising fuel costs, currency fluctuations or extreme weather.
Hedge funds and other large derivatives users that “expose counterparties to significant credit risk,” such as insurer American International Group Inc. and mortgage finance companies Fannie Mae and Freddie Mac, wouldn’t be eligible for the exemption.
Writedowns, Losses
Opaque financial products, including derivatives, have contributed to almost $1.6 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Toppled companies included Lehman Brothers Holdings Inc., the investment bank that filed for bankruptcy, and AIG, which is surviving on government loans.
Regulators had criticized an initial draft by Frank, a Massachusetts Democrat, at a hearing of the panel Oct. 7. That version “could unintentionally preserve existing regulatory gaps,” Henry T.C Hu, director of the Securities and Exchange Commission’s division of risk, strategy and financial innovation, said in testimony.
In response, Frank offered a new definition of “major swap participants” that would limit those eligible for exemptions from new regulations. The panel adopted that provision yesterday.
To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.com.
Last Updated: October 15, 2009 15:27 EDT |
