Draft legislation to regulate the market for over-the-counter derivatives was introduced late last week by U.S. Rep. Collin Peterson, DFL-7th District.
Peterson, chairman of the U.S. House Agriculture Committee, said the draft is a starting point for discussion in a turf battle that includes the White House, the Ag Committee and the House Financial Services Committee chaired by Rep. Barney Frank, D-N.Y.
The ultimate goal is to bring order to the largely unregulated over-the-counter swaps market that played a large role in the credit crisis and the collapse of some of America's largest financial houses a year ago.
The 201-page draft bill is titled the Over-the-Counter Derivatives Markets Act of 2009.
"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.
The Ag Committee held hearings last year on the issue, and Peterson authorized a bill to put the OTC trading of futures under the U..S. Agriculture Department's Commodities Futures Trading Commission. Both Frank and the White House opposed the legislation, however.
Peterson and Frank over the summer worked out a concept under which legislation could be drafted to regulate derivatives.
"In this draft, we attempt to reflect the concerns of end users while bringing oversight and transparency to OTC trading," Peterson said. "I believe this draft and the feedback we receive from it in our committee will help us move forward quickly to enact much-needed legislation to restore accountability to our financial markets."
The draft circulated Friday contains provisions addressing OTC clearing, trading, capital and margin requirements, and position limits. It builds on legislation the House Agriculture Committee passed earlier this year, H.R. 977, to strengthen the oversight of futures, options and OTC markets.
While the White House and Frank's committee would have joint rulemaking between the Commodities Futures Trading Commission and the Securities Exchange Committee, Peterson's draft would have the CFTC consulting with SEC and prudential providers for rulemaking regarding swap-related provisions
The Peterson draft would include foreign exchange in the definition of swap and exclude foreign exchange forwards from the definition only under certain circumstances. Both the administration and Financial Services Committee would exclude foreign exchange swaps and foreign exchange forwards from the definition of a swap.
"Depending on the underlying asset on which a derivative is based, either the SEC or the CFTC, or potentially both, will oversee the regulation of OTC derivative dealers, exchanges and clearinghouses," according to the June 30 concept paper agreed to by Peterson and Frank.
"Derivatives must be cleared by an approved clearinghouse. Exchange trading and trading on electronic trading platforms will be strongly incentivized and encouraged," it said.
Final legislation should also limit speculation or provide enhanced oversight of speculative positions, they agreed.