Mirroring action taken by the House Financial Services Committee last week, the House Agriculture Committee Wednesday gave “end-users” a break in legislation that it passed to regulate the $500 trillion-plus over-the-counter (OTC) derivatives market.

The legislation (HR 3795), which was cleared by voice vote, would exempt “end-users” who use derivatives to hedge commercial risk from many of the bill’s requirements (see Daily GPI, Oct. 16). Derivatives, which were blamed for the financial meltdown last fall, are used by energy producers and large consumers to hedge against price fluctuations and other business risks.

Agriculture Committee Chairman Collin C. Peterson (D-MN) said that “end-users” were not the target of the committee’s bill, but rather derivatives dealers and major swaps participants.

This marked the third time that the House agriculture panel has moved on OTC derivative legislation, Collin said, adding that the latest bill builds on legislation passed in February (HR 977).

“We’ve made significant improvements. [We’ve] incorporated ideas from the administration and from a lot of other folks that we have talked to,” said Peterson, chief sponsor of the Over-the-Counter Derivatives Markets Act of 2009. The final bill will “bring all of these dark markets into regulation and transparency.”

Specifically, the measure would require that OTC swaps be processed through clearinghouses, and that cleared swaps be traded on regulated exchanges or an “alternative swap execution facility,” such as an electronic trading facility.

However, OTC swap transactions will be exempted from the clearing/trading requirement if one counterparty is neither a swap dealer nor major swap participant and demonstrates to the Commodity Futures Trading Commission (CFTC) “appropriate” risk management practices. The exemption does not apply if any counterparty is a “Tier 1,” or major, financial holding company.

Under the agriculture panel’s legislation, swaps must be submitted for clearing if a derivatives clearing organization will accept the swap. Swaps that are not accepted for clearing must be reported to a swap repository or the CFTC.

The measure also would require the CFTC to establish position limits on swaps that perform significant price discovery function. And it calls for the CFTC to establish position limits on futures transactions for physically deliverable commodities that are applicable to the spot month, each month and all months aggregated.

Last Thursday the House Financial Services Committee approved by a vote of 43 to 26 legislation that requires any derivative product that is cleared to be traded on an exchange or electronic platform if the derivative contract is between two financial institutions. However, it would exempt end-users — such as energy producers and consumers — from having to trade on exchanges if they use derivative products to hedge commercial risk.

The two House committee bills will have to be reconciled before legislation is sent to the House floor. Rep. Barney Frank (D-MA), chairman of the House financial services panel, said he expects the House to vote on legislation by “no earlier than mid or late November. [It will then be] dealt with in the Senate and not enacted until the end of this year” at the earliest.

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