Flanked by Senate and House leaders and key administration officials, President Obama last Wednesday signed into law landmark legislation that lays the groundwork for the biggest overhaul of the financial regulatory system since the 1930s.
The president’s action came less than a week after the Democrat-crafted bill (H.R. 4173) cleared Congress, with the help of the backing of a handful of Republicans (see NGI, July 19).
The three Senate Republicans (Scott Brown of Massachusetts, Susan Collins of Maine and Olympia Snowe of Maine), who voted for the Wall Street reform bill in the Senate, joined Democrats at the signing ceremony, which took place at the Ronald Regan Building in Washington, DC. About 400 people were invited to the signing of the 2,300-page bill, which was one of the president’s top domestic priorities. The measure was shepherded through Congress by Senate Banking Committee Chairman Christopher Dodd (D-CT) and Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee.
Very few, if any, Wall Street CEOs were invited, and the White House took the media to task for making an issue out of it. “This is a fake controversy. The CEOs who opposed reform never expected to be invited to the bill signing and not a single one has complained to the administration,” a spokeswoman said.
The reform bill is designed to ensure that firms “compete on price and quality, not tricks and traps,” Obama said at the signing. “It demands accountability and responsibility from everyone. It provides certainty to everybody from bankers to farmers to business owners. And unless your business model depends on cutting corners or bilking your customers, you have nothing to fear from this reform.”.
And “it will finally bring transparency to the kinds of complex, risky transactions that helped trigger the financial crisis,” such as derivatives, Obama said.
Of particular interest to the energy industry, the legislation, which comes nearly two years after the collapse of banks and Wall Street investment houses, marks the first time that the over-the-counter (OTC) derivatives market will be regulated by the federal government. It requires OTC transactions to be traded on regulated exchanges much like stock, and to be cleared in clearinghouses in order to limit excessive speculation in markets.
However, it grants a narrowly crafted clearing exemption for large commercial traders that use derivatives to hedge the risk associated with trading of physical products or end-users that use derivatives to legitimately hedge their commercial risk rather than for speculative purposes. The exemption would apply to a broad array of commodities, including oil, natural gas, electricity and coal.
Despite the exclusion for bona fide hedgers, industry still has reservations about the bill.
“Natural gas suppliers have serious concerns about the potential for unintended consequences…if regulators [Commodity Futures Trading Commission] establish margin requirements for uncleared swaps. In order to avoid a huge potential drain on capital that could otherwise be invested in job creation and infrastructure, we hope regulators will set rules that maintain the integrity of the energy markets and protect the economy,” said Skip Horvath, president of the Natural Gas Supply Association.
The derivatives language in the legislation, which was largely drafted by Senate Agriculture Committee Chair Blanche Lincoln (D-AR), retains a provision that would require large financial firms, such as JPMorgan Chase, Goldman Sachs and Citibank, to either shed or spin off their lucrative derivatives trading desks (see NGI, April 19). The spin-off language has caused some uneasiness among the bona fide hedgers of commercial risk. “Our concern is it [the language] would reduce the number of counterparties with which we could trade” and the availability of capital, one producer group said.
The American Petroleum Institute (API), which represents major producers, expressed concern with new Security and Exchange Commission (SEC) requirements in the bill. “The final bill, while significantly improved from earlier versions, still contains several provisions that could harm American oil and natural gas companies and create additional unemployment,” said Misty McGowan, director of API’s federal relations department.
“In particular API is concerned by a provision that requires all SEC-listed companies to report detailed information about the payments they make to foreign governments regarding the development of oil, natural gas and minerals,” she said. “While API supports efforts to improve transparency in revenue payments, including the World Bank-backed Extractive Industries Transparency Initiative, this legislation’s unilateral approach would give foreign oil and natural gas companies access to confidential, proprietary information that they could use against U.S. firms when competing for contracts for crucial energy resources around the globe.”
CFTC Chairman Gary Gensler said the Commission stands ready to carry out the new rules. “The Wall Street reform bill will — for the first time — bring comprehensive regulation to the over-the-counter derivatives marketplace,” he said. “Derivatives dealers will be subject to robust oversight. Standardized derivatives will be required to trade on open platforms and be submitted for clearing to central counterparties. The Commission looks forward to implementing the Dodd-Frank bill to lower risk, promote transparency and protect the American public.”
CME Group applauded the passage of the legislation and vowed to make sure that the new rules are applied fairly for all market participants. “The Dodd-Frank Act reinforces the core tenets of CME Group’s markets: price transparency; liquid markets with low transaction costs; market integrity; customer protection; and safety and soundness in central counterparty clearing services,” the exchange said. “We look forward to working with our customers and other market participants, as well as regulators to ensure that new rules implementing the Act serve the public interest, foster competition and innovation and do not place the U.S. financial services sector at a competitive disadvantage in our rapidly globalizing financial markets.”
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