One day after the House Agriculture Committee approved HR 977, the Derivatives Markets Transparency and Accountability Act of 2009, Global commodities exchange CME Group on Friday bashed the legislation, saying it would drive “a significant portion” of over-the-counter (OTC) trading offshore and outside of the U.S. government’s jurisdiction.

Under HR 977, clearing of OTC transactions can occur through a Commodity Futures Trading Commission (CFTC)-regulated facility or through a clearinghouse regulated by the Securities and Exchange Commission. But the measure prohibits the Federal Reserve from regulating clearing of OTC transactions. As an alternative to clearing, OTC transactions may be reported to the CFTC as long as reporting parties demonstrate financial integrity and abide by net capital regulations established by the CFTC. The bill would also give the CFTC the authority to carry out criminal prosecution of fraud and manipulation of commodity futures markets, but only in cases where the Department of Justice decides not to take action (see Daily GPI, Feb. 13; Feb. 12).

While CME commended the committee for attempting to ensure that the regulated exchange-traded futures and options markets and the OTC derivative markets serve the best interests of the investing public, CME does not support the bill.

“The legislation requires the imposition of hard position limits in already-regulated commodity and energy futures markets that will significantly impair liquidity necessary for commercial hedgers and market professionals such as farmers, energy producers and airline and transportation companies seeking to legitimately transfer business risks,” CME said. “The bill is directly antithetical to its own purposes in that it will divert trading in highly regulated commodity and energy futures markets to less regulated OTC and foreign markets accessible to U.S. investors but beyond the reach or jurisdiction of the U.S. government.”

CME said the legislation also imposes “artificial constraints” on the definition of hedge transactions that will impair OTC dealers from facilitating more complex hedging transactions and hedging their own net exposures from their swap dealing activities in regulated futures markets with the consequential result of further impairing hedging and risk transfer opportunities for U.S. investors. The trading exchange conglomerate added that the bill “effectively requires the mandatory clearing of virtually all OTC derivative contracts and will therefore drive a significant portion of OTC business offshore, lessening the regulatory effectiveness of the CFTC.”

CME said it is open to working with lawmakers to continue to discuss proposals to “ensure a sound regulatory financial system.”

The bill, which was authored by Committee Chairman Collin Peterson (D-MN), nearly mirrors legislation that he introduced last year in an attempt to tame speculation in the energy markets. That measure (HR 6604) was approved by the House in July, but it never cleared the Senate. A companion bill has been introduced in the Senate 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.

Like its predecessor, the new House agriculture panel bill also would require international exchanges that host U.S.-based commodities to share trading data with the CFTC and adopt speculative position limits similar to those impose by regulated exchanges in the United States.

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