Derivatives Proposals in U.S. House Move Closer to Obama’s Plan

Derivatives Proposals in U.S. House Move Closer to Obama’s Plan

Oct. 10 (Bloomberg) -- House Democrats offered new proposals to regulate the $592 trillion over-the-counter derivatives market after Obama administration officials said an earlier plan left loopholes.

Representative Collin Peterson, head of the Agriculture Committee, presented his draft legislation yesterday. Hours later, Representative Barney Frank, chairman of the House Financial Services Committee, circulated among colleagues changes he had promised in an effort to “tighten up” the plan he announced a week ago.

President Barack Obama’s administration proposed regulatory changes in August, including imposing higher capital and margin requirements on derivatives markets and requiring certain contracts be processed through clearinghouses. The legislative proposals laid out yesterday hewed more closely to regulatory changes sought by the administration than did the draft Frank offered on Oct. 2.

“Some of the perceived loopholes in the Frank bill, it looks like Peterson plugged a number of those up,” said Kevin McPartland, a senior analyst in New York at Tabb Group, a financial-market research and advisory firm, in an interview.

Maneuvering over the legislation is a test of the administration’s call to tighten regulation in an effort to prevent a repeat of the global financial crisis. 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.

Everyday Risks

House lawmakers say they are trying to protect so-called end-users, corporations that rely on derivatives to hedge everyday operational risks, such as fluctuations in foreign currency rates, interest rates and commodity prices. The Obama plan would subject companies to higher collateral requirements whether they trade standardized or customized contracts.

Frank’s original proposal would exclude companies if they use derivatives to hedge risk.

Gary Gensler, chairman of the Commodity Futures Trading Commission, told lawmakers Oct. 7 that the provision could free from oversight all hedge funds and corporations that use derivatives, including mortgage-finance companies Fannie Mae and Freddie Mac.

“Some of the stuff was inadvertent,” Frank said in an Oct. 7 interview. “We didn’t mean to undo this or undo that. It’s an ongoing process. Things go through many drafts.”

‘Significant’ Credit Losses

The revised draft that Frank, a Massachusetts Democrat, circulated among colleagues and staff at the Capitol would continue to exclude most corporations that use derivatives to mitigate operational risk. In the new version, derivatives users that are large enough to “expose counterparties to significant credit losses” wouldn’t be eligible for the exclusion.

Peterson’s measure would exempt all except the largest end- users from new disclosure, collateral and clearing requirements.

Peterson, a Minnesota Democrat, gave Gensler much of what he asked for in an Aug. 17 letter to lawmakers, including tougher execution requirements for standard contracts and the authority to regulate over-the-counter foreign currency swaps.

“This draft reflects the hearings the Agriculture Committee recently held looking at current OTC reform proposals, and it incorporates provisions that have been proposed by Chairman Barney Frank’s committee and the administration,” Peterson said in a statement yesterday.

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