Over-the-counter exchanges would be brought under federal oversight for the first time under a bill approved Wednesday by the U.S. House Agriculture Committee.
By voice vote, the panel approved a bill passed by the House Financial Services Committee but with a delete-all amendment, substituting language by House Agriculture Committee Chairman Collin Peterson, DFL-7th District.
The bill institutes a clearing and trading requirement for all OTC derivative, or swap, transactions between dealers and large market participants that are accepted by a clearinghouse. Non-cleared swaps must be reported, with major participants and dealers adhering to strengthened capital and margin requirements.
The bill exempts commercial end users who use derivatives markets to hedge their price risk from the clearing requirement.
"This legislation reflects more than two years of public hearings and a lot of bipartisan work," said Peterson. "The clearing and exchange trading requirements, along with strong position limits provisions, will increase transparency in the marketplace, will benefit end users by not submitting them to onerous cash collateral requirements, and will hold swap dealers and major swap participants to new standards for capital, margin, business conduct and other requirements to reduce their ability to again place our financial system in such dire straits."
The bill includes provisions from a previous bill approved in February by the committee to strengthen position limits on futures contracts for physically deliverable and over-the-counter commodities as a way to prevent potential price distortions caused by excessive speculative trading.
Such trading was seen as a cause, among many, that led to the collapse of the stock market and the U.S. economy a year ago. Peterson said the move actually started several years ago in energy futures markets, first with natural gas and then for crude oil.
"Now derivatives, in and of themselves, did not cause the financial meltdown of last year, but they played a role," Peterson said in a statement to the panel Wednesday. "Had the provisions of the bill we consider today been in place last year, irresponsible financial institutions would never have gotten themselves in a position where they needed billions of dollars in taxpayer money to keep them from failing."
Provisions included in the bill would:
- Institute a clearing requirement for swaps and security-based swaps, with derivatives clearing organizations determining which swaps must be cleared.
- Provide for exceptions from the clearing requirement for commercial end users who are not swap dealers or major swap participants.
- Hold swaps dealers and major swap participants accountable through margin, capital, business and other conduct requirements.
- Require cleared, listed swaps to be traded on regulated exchanges.
- Require reporting and public disclosure of swap transactions.
- Allow the Commodity Futures Trading Commission to impose position limits on swaps and the Securities and Exchange Commission to impose position limits on security-based swaps.
- Provide for exclusive jurisdiction of swaps products under the Commodity Futures Trading Commission, with security-based swaps products under the exclusive jurisdiction of the Securities and Exchange Commission
- Call for CFTC and SEC consultation in rulemaking regarding swap and security-based swap provisions
- Require CFTC to set trading limits for physically-deliverable commodities, in order to prevent excessive speculation.
"If it were up to me, a bill to regulate these markets would have been signed into law a long time ago," Peterson said. "However, large banks have a long history of using their financial and political advantage to try to gum up and slow down reform efforts by sowing discord between members and committees."
Peterson and House Financial Services Chairman Barney Frank, D-Mass., feuded most of the summer over whose panel would have jurisdiction over the matter.
"But the time has come for this committee to act, and ... I believe we have come up with an approach that can let the committee move this bill forward," Peterson said. "This legislation brings real accountability and oversight to derivatives markets."