The U.S. House of Representatives last Wednesday voted out a long-anticipated conference report on overhauling the financial regulatory system, including reining in commodities market speculation by forcing over-the-counter (OTC) derivative trades onto regulated exchanges and clearinghouses.

And by the end of the week Senate Democrats appeared to be gaining enough votes to possibly head off a Republican filibuster of the reform package later this month.

Sen. Maria Cantwell (D-WA), who voted against the Senate's reform bill in May, said last Thursday that she would support the final version of the financial regulatory reform package. "With the support of Maine Republican Susan Collins and the expected support of a successor to the late West Virginia Democrat Robert C. Byrd, Cantwell's announcement gives Democratic leaders all but one of the 60 votes they will need to fight a filibuster and end debate on the report," CQ Today reported.

"I will vote in support of the conference report because it makes great strides toward our ultimate goal: bringing all standard derivatives onto exchanges and clearinghouses, with aggregate position limits and strong anti-manipulation tools," Cantwell said. She said she decided to support the final legislation after Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), gave her "written assurance" that the bill "explicitly requires that swap dealers, major swap participants and financial entities use a clearinghouse for standardized or 'clearable' derivatives transactions."

Another critical swing vote, Sen. Scott Brown (R-MA), remained undecided last week, and Sen.Olympia Snowe (R-ME) was silent on her position on the conference report. Both had broken ranks and voted for the Senate regulatory reform bill in May (see NGI, May 24). The Senate is expected to take up the final version (HR 4173) by mid-July. By that time, a successor to Byrd, to be appointed by West Virginia's Democratic governor, is likely to be seated.

"The Democrats are doing everything they can to get those 60 votes" in the Senate, an energy source said. "It's not a given" that the measure will get through the Senate, she said. The bill cleared the House by 237-192.

The legislation, which comes nearly two years after the collapse of banks and Wall Street investment houses, calls for OTC derivatives transactions to be cleared in clearinghouses and traded on major exchanges in an effort to restrict excess speculation in markets. But it provides a narrowly crafted clearing/trading exemption for end-users who use derivatives to legitimately hedge their commercial risk rather than for speculative purposes.

While there are "some ambiguities in the legislation," the intent of the bill is to protect commercial end-users that use derivatives for legitimate hedging from mandatory clearing, capital and margin requirements, said Susan Ginsberg, vice president of crude oil and natural gas regulatory affairs for the Independent Petroleum Association of America. She noted that the rulemaking process by the CFTC will be critical to ensure that end-users are protected.

The conference report apparently makes a significant omission -- it does not identify natural gas utilities and power market participants as commercial end-users that should be exempted from the requirements of clearing and posting margin to underpin swaps transactions. "It is not clear whether the omissions/deletions were unintentional or specifically sought by the Commodity Futures Trading Commission," said energy analyst Christine Tezak of Robert W. Baird & Co.

Whatever the cause, "the end result alarms both regulated utilities and unregulated power generators who routinely use swaps to manage commercial risk associated with their primary energy businesses. When it comes to swaps, the Hobson's choice appears to now be limited to clearing them (with margins requirements) or not clearing them, and posting even higher margins," Tezak said.

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