House Agriculture Committee Chairman Collin Peterson (D-MN) has released discussion draft legislation that seeks to reform the $580 trillion over-the-counter (OTC) derivatives market. It mirrors the draft proposal of the House Financial Services Committee in some respects but departs from it in others.

The agriculture panel draft would exempt trading parties from third-party clearing if one of the counterparties is not a futures swap dealer or security-based swap dealer and can demonstrate appropriate business/risk management practices for using noncleared futures swaps and security-based swaps. The proposal is similar to one in the draft bill issued earlier this month by Rep. Barney Frank (D-MA), chairman of the House financial services panel (see Daily GPI, Oct. 6).

In return for the clearing exception, the House agriculture committee draft would require that futures swaps and security-based swaps be traded on regulated exchanges or alternative swap executive facilities. The Obama administration has proposed a similar trading requirement, but Frank shied away from it in his draft (see Daily GPI, Aug. 13).

Unlike the proposals of the administration and Frank, the agriculture committee’s draft would grant a trading exception if there is no regulated exchange or alternative swap execution facility that will list the swap.

The agriculture committee draft would require clearing agencies — self-regulatory organizations (derivative organizations or depositories) that are required to register with the Commodity Futures Trading Commission (CFTC) — or derivative clearing organizations (DCO), such as clearinghouses or clearing corporations, to determine which futures swaps and security-based swaps must be cleared.

In contrast, Frank proposes that the clearing decision be left up to the CFTC and the Securities and Exchange Commission (SEC), while the administration supports a combination of both House proposals.

Under the Obama and Frank proposals the Department of Treasury would be called in to settle any dispute between the CFTC and SEC, but the agriculture bill would allow either of the two agencies to petition the U.S. Court of Appeals for the District of Columbia Circuit to review rules that may encroach on the other’s jurisdiction.

With respect to mixed swaps — swaps with both security and futures features — the CFTC and SEC would have dual regulation under the Frank and Obama proposal. However, the agriculture draft proposes a “preponderance test” that would assign swap products to either CFTC or SEC regulation depending on what the swap is primarily based on.

At a hearing last week Frank said “derivatives are a very legitimate way for producers of end products to reduce volatility. Our job is to find a way to preserve that legitimate function while diminishing the excessive volatility that comes from people who are doing it to speculate, from diminishing the risk that comes when people get overextended.”

The two House committees will seek to combine the bills over the upcoming weeks. Frank last week said his goal was to send a bill to the House floor by November.

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