Senate Agriculture Committee Chair Blanche Lincoln (D-AR) has postponed until Friday the release of a highly explosive bill that would require major swap dealers to separate their derivatives businesses from investment bank activities; would provide a "narrow exemption" to bona fide hedgers of the requirements for mandatory trading and clearing of over-the-counter (OTC) derivatives; and would increase the enforcement authority of regulators.

Major swap dealers, such as JPMorgan Chase & Co. and Goldman Sachs Group, received a major jolt Wednesday when they learned that the Senate agriculture panel's legislation would force them to "spin off or push out their [lucrative derivative] swap desks" from their Wall Street bank operations, according to the committee's proposal.

And the Senate measure would impose a statutory "fiduciary duty" on swap dealers -- requiring them to put customer interests ahead of their own -- when advising governmental entities or parties on pension plans, endowments and retirement plans. The measure also would prohibit government bailouts to swap dealers, major swap participants, security-based swap exchanges that list swaps, and clearinghouses that clear swaps.

As was expected, it calls for mandatory exchange trading and clearing of standardized derivative contracts (see Daily GPI, April 15). However, the bill would provide a "narrow exemption" of the proposed the trading/clearing requirements to those who use derivatives to hedge "legitimate" commercial risk, said a committee staffer. Those subject to the narrow exemption would likely include producers, manufacturers, airlines and other large users of energy. Unlike the House bill, which passed in December, the Senate exemption would not extend to speculators, such as hedge funds (see Daily GPI, Dec. 14, 2009).

The Natural Gas Supply Association (NGSA), which represents major natural gas producers, wants to see the specifics on the proposed exemption. "The devil's in the details. It depends on how the exemption [provision] is written, how narrow it is. If it's [too] narrow, who are you going to be doing business with," said Jenny Fordham, NGSA director of energy markets and government affairs. "That's kind of the $900 billion question."

Looking to the entire derivatives market, mandated exchange trading or centralized clearing and margining could drain the U.S. economy of approximately $900 billion in productive capital that companies would simply have to post or set aside to insure their risk-management transactions, the NGSA and National Corn Growers Association (NCGA) wrote in a joint letter Thursday to Lincoln; Sen.Saxby Chambliss of Georgia, the ranking Republican of the Senate agriculture panel; and Senate Majority Leader Harry Reid (D-NV).

In a joint letter to Congress in December, the NGSA and the American Exploration and Production Council estimated that mandatory clearing of OTC derivatives would cost the oil and natural gas industry $100 billion.

If they do not have an exemption the alternative is for companies to cut back on their hedging, which the NGSA and NCGA said would expose their customers to greater commodity and financial risks. As a result of the clearing and margining requirements, the energy and agriculture industries would have less capital available for drilling and product production, the groups said.

Lincoln will probably begin marking up her legislation next week, the committee staffer told NGI. If it clears the Senate agriculture panel, the bill would then be sent to the Senate floor where it would be folded into the broader legislation overhauling the financial regulatory system that was passed out of the Senate Banking Committee last month (see Daily GPI, March 24).

As to its chances of passage, Lincoln has the votes in committee, an industry lobbyist said. He pointed out that when it goes to the floor, "it's not health care; if the Democrats can keep their caucus together, they shouldn't have too much trouble getting a couple [of] Republicans to go with them...maybe the two Maine senators, maybe [Chuck] Grassley, [R-IA]. It looks like the agricultural industry will back the bill and they can put pressure on some Republican lawmakers. The new wild card is the Tea Party. We don't know how they will react. They don't have a platform. If the Republicans want to kill this, they'll have to get the Tea Party on board, and that brings a lot of unknowns."

The derivatives part of the sweeping financial regulatory reform measure was at one time considered the least controversial section of the legislation, but that's no longer the case. It has become highly partisan on Capitol Hill, with Republicans vowing to oppose it on the Senate floor, as well as off Capitol Hill.

In meeting with Senate and House leaders Wednesday, President Obama said he was confident that lawmakers could work out an effective, bipartisan package. But he "made clear that bipartisanship should not be equated with an openness to lobbyists' loopholes and special interest carve-outs and that he would be unwilling to negotiate on some key issues. And that he could not accept bad policy in pursuit of bipartisanship," according to White House spokesman Robert Gibbs.

Obama called the OTC derivatives market a "shadow economy that is enormously powerful...We want to get that into daylight so that regulators and ordinary Americans know what's going on."

The Senate agriculture panel's bill also would require foreign exchange swaps and foreign exchange forwards operating in the United States to be regulated. And it would give regulators clear broad enforcement authority to bring charges against any person, including swap dealers, if they knowingly engage in a swap transaction with a counterparty, which is used to defraud a third party or the public.

While Wall Street firms are sending a stream of executives to lobby Washington against major reforms, groups supporting sweeping financial changes have begun cranking up their activities, aimed both at the Commodity Futures Trading Commission and the Congress. The Commodity Market Oversight Coalition (CMOC) has been developing since 2007 and is gaining traction. CMOC, which boasts more than 450 member organizations, is an informal alliance of industry groups, consumer advocates, agricultural interests and academics, representing commodity producers, processors, distributors, retailers, and residential, commercial and industrial end-users, and targeting excessive speculation.

Another large coalition, the Americans for Financial Reform (AFI) with more than 200 organization members, includes most labor unions and consumer advocacy organizations including the Consumer Federation of America and the American Association of Retired Persons. Another large group, S.O.S., or Stop Oil Speculation Now, is mainly backed by the aviation industry. All the groups maintain websites and public relations campaigns aimed at reform.

The groups are stepping up activities this month as the Congress moves toward a decision. AFI is coordinating meetings on financial reform in public forums across the country. It has scheduled "showdowns" or demonstrations in several cities at the end of the month when Bank of America and Wells Fargo hold their annual meetings. On April 29 AFL-CIO President Richard Trumka will lead a rally and march in New York City's Financial District. "Wall Street tanked America's economy. We're 11 million jobs in the hole, and it's time for Wall Street to pay up to create them," the union maintains.

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