Mirroring action taken by the House Financial Services Committee earlier this month, the House Agriculture Committee last Wednesday gave "end-users" a break in legislation that for the first time would regulate the $500 trillion-plus over-the-counter (OTC) derivatives market.

The amended legislation (HR 3795), which cleared the panel by voice vote, would exempt "end-users" that use derivatives to hedge their price risk from the bill's clearing/trading requirements. Derivatives, which were blamed for the financial meltdown last fall, are used by energy producers and large consumers to hedge against price fluctuations and other business risks.

Agriculture Committee Chairman Collin C. Peterson (D-MN) said that "end-users" were not the target of the committee's bill, but rather derivatives dealers and major swaps participants.

This marked the third time that the House agriculture panel has moved on OTC derivative legislation, Peterson said. The bill contains provisions from legislation passed in February (HR 977), including the strengthening of position limits on futures contracts for physically deliverable and OTC commodities as a way to prevent potential price distortions caused by excessive speculative trading.

"We've made significant improvements. [We've] incorporated ideas from the administration and from a lot of other folks that we have talked to," said Peterson, chief sponsor of the Over-the-Counter Derivatives Markets Act of 2009. The final bill will "bring all of these dark markets into regulation and transparency."

Specifically, the measure would require that OTC swaps be processed through clearinghouses, and that cleared swaps be traded on regulated exchanges or an "alternative swap execution facility," such as an electronic trading facility.

However, OTC swap transactions will be exempted from the clearing/trading requirement if one counterparty is neither a swap dealer nor major swap participant and demonstrates to the Commodity Futures Trading Commission (CFTC) "appropriate" risk management practices. The exemption does not apply if any counterparty is a "Tier 1," or major, financial holding company.

Under the agriculture panel's legislation, swaps must be submitted for clearing if a derivatives clearing organization will accept the swap. Swaps that are not accepted for clearing must be reported to a swap repository or the CFTC.

The measure would hold swaps dealers and major swap participants accountable through margin, capital, business and other conduct requirements. It also would require reporting and public disclosure of swap transactions.

The measure would require the CFTC to establish position limits on swaps that perform significant price discovery function. And it calls for the CFTC to establish position limits on futures transactions for physically deliverable commodities that are applicable to the spot month, each month and all months aggregated.

HR 3795 was introduced on Oct. 13 by Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee. Following that committee's approval of the bill by a 43-26 vote on Oct. 15, it was referred to the House Agriculture Committee for action (see NGI, Oct. 19).

Frank said he expects the House to vote on legislation by "no earlier than mid or late November. [It will then be] dealt with in the Senate and not enacted until the end of this year" at the earliest.

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