The U.S. House of Representatives late Wednesday voted out the conference report calling for sweeping financial regulatory reforms, including regulation of the over-the-counter (OTC) derivatives market for the first time. But the fate of the reform package in the Senate remains uncertain (see Daily GPI, July 1).

A key Republican vote, Sen. Susan Collins of Maine, said she would side with Democrats after revisions were made to the conference, CQ Today reported. However, with the death of Sen. Robert Byrd (D-WV), Senate Majority Leader Harry Reid (D-NV) said Democrats were still short of the 60 votes needed to head off a filibuster.

Another critical swing vote, Sen. Scott Brown (R-MA), is undecided, and Sen.Olympia Snowe (R-ME) has been silent on her position on the conference report. Both had broken ranks and voted for the Senate regulatory reform bill in May (see Daily GPI, May 24). The Senate is expected to take up the bill (HR 4173) by mid-July. By that time, a successor to Byrd is likely to be appointed.

"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 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 Commodity Futures Trading Commission 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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