House Committee Moves to Alter Derivatives Bill

Discussion in 'Wall St. News' started by S2007S, Oct 14, 2009.

  1. S2007S


    * OCTOBER 14, 2009, 5:57 P.M. ET

    House Committee Moves to Alter Derivatives Bill


    WASHINGTON -- The House Financial Services Committee's leadership moved to alter its bill to regulate derivatives, mandating that some derivative contracts trade on exchanges, a switch from a position it staked out late last week.

    The change in the form of an amendment from Barney Frank, chairman of the committee, moves the bill closer to legislation proposed by the House Agriculture Committee and Obama administration, but it drew criticism from several Republican members.

    The House is at the beginning of the legislative process to enact the Obama administration's proposed financial regulation overhaul. A vote on the derivatives bill and its amendments is expected Thursday morning. The House committee is expected to debate a provision to create a new agency to regulate financial products sold to customers Thursday and Friday.

    Rep. Frank (D., Mass.) introduced an amendment to the legislation Wednesday that would require all swaps that are standard enough to clear through a central counterparty to be traded on exchanges, so long as they are between financial institutions.

    Companies that use swaps to hedge interest-rate and commodity risks tied to their business would be exempt from trading on exchanges, unless its position was so large it caused a risk to its counterparties.

    The move bows to arguments from the Treasury Department and Commodity Futures Trading Commission that derivatives should be traded on exchanges to reduce systemic risk and increase price transparency. The original version of the bill introduced late last week only required swaps be cleared through a central counterparty, but didn't mandate trading on an exchange or electronic equivalent.

    Rep Frank's change in position surprised Republicans and others. He didn't offer an explanation for the amendment other than to suggest that his thinking has been fluid. Mr. Frank said he initially supported exchange trading and then was "persuaded by conversations with end users" against it.

    Now, he said, he was at a point he "felt comfortable" with the bill. "Watching sausage being made isn't always attractive. It is clearly the case there has been a lot of give and take," Frank said.

    Rep. Scott Garrett (R., N.J.) objected to the amendment, stating that the bill was "moving until last night to clearing house arrangement. This goes 180 degrees in the absolute other direction." Rep. Garrett and other Republicans said putting derivatives onto exchanges isn't the only way to bring transparency to the market.

    Rep. Frank agreed but noted, "We are dealing with the kind of activity that is both in the interest of the individual and has systemic impact."

    The committee also grappled with several other amendments to the bill, including repealing a section that would give regulators authority to ban certain types of swaps.

    The bill will have to be reconciled with draft legislation under consideration with the House Agriculture Committee before it would go to the full House for a vote. The Senate is less advanced in its discussions to regulate derivatives so the timetable for when a bill could be signed into law is sliding.