For producers, the jury was still out Wednesday on how the Obama administration’s legislative package to regulate the $500 trillion over-the-counter (OTC) derivatives market would impact them, but there was some cautious relief.

The 115-page legislative proposal, which the Treasury Department sent to Capitol Hill Tuesday (see Daily GPI, Aug. 12), “seems to be targeting…dealers rather than end-users,” such as oil and gas producers, in the OTC derivatives market, said Lee Fuller, vice president of government relations for the Independent Petroleum Association of America, which represents independent producers.

“At this point we think that the administration is hearing the message of producers [about] the importance of commodity market hedging to managing capital,” he said.

The Obama legislative language “appears to be maintaining a lot of [the] flexibility” to give producers a “stable market to operate [in when] planning capital,” Fuller noted. With hedging, producers “create financial certainty for their production over multi-year time.”

But Fuller wasn’t ready to endorse the entire legislative package. “This is a complicated structure…A lot of it hinges on the details. Some of it hinges on what constitutes standardized [derivatives] contracts and what constitutes customized contracts.”

The American Petroleum Institute (API), which represents major oil and gas producers, was still combing through the Obama legislative proposal and was equally as cautious in its comments. “We certainly do not oppose additional transparency in the marketplace,” as is proposed by the Obama administration, said API spokeswoman Cathy Landry.

But “we believe that OTC derivatives regulatory reform should not jeopardize business efforts to manage risks, and businesses must be able to participate in bilateral transactions as a hedging tool,” she said.

On the plus side, it appears that producers “wouldn’t have to post cash collateral” for their hedges in the OTC derivatives markets under the legislative language, but Landry fears there may be other things in the package that could affect producers’ ability to hedge or manage their risk.

The Obama administration’s regulatory reforms call for all standardized OTC derivatives, including energy transactions, to be centrally cleared; require higher capital and margin requirements for non-standardized derivatives; extend the scope of regulation to include OTC derivative dealers and major market participants; and give the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) stricter enforcement authority, and the power to set position limits and large trader reporting requirements for OTC derivatives.

House and Senate lawmakers will consider incorporating some of the Obama language in their bills. The heads of the two most powerful House committees overseeing derivatives markets came together earlier this month on the framework for legislation that would enhance federal regulatory authority to crack down on excessive speculation in OTC markets (see Daily GPI, Aug. 3).

In many respects the Obama legislative package mirrors the House proposal. The agreement between House Financial Services Committee Chairman Barney Frank (D-MA) and House Agriculture Committee Chairman Collin Peterson (D-MN) calls for “robust oversight” of OTC derivatives dealers, exchanges and clearinghouses by the SEC and the CFTC. It gives the agencies the authority to prohibit or regulate transactions that are not traded on an exchange or cleared; to set “significantly higher capital and margin charges” on transactions that are not traded on exchanges or centrally cleared; and to set position limits to curb excessive speculation.

A similar bill was introduced in the Senate earlier this year by Sen. Tom Harkin (D-IA), chairman of the Senate Agriculture Committee. It seeks to bring all OTC financial transactions, which currently are traded without federal oversight, onto regulated exchanges.

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