After winning a critical procedural vote last Thursday, the Democrat-crafted legislation overhauling the financial regulatory system cruised to an easy victory in the Senate. President Obama said he planned to sign the bill into law this week.
The final vote on the conference report (H.R. 4173) was 60-39 mostly along partisan lines, with three Republicans — Scott Brown of Massachusetts, Olympia Snowe of Maine and Susan Collins of Maine — breaking ranks to support the historic, sweeping bill and send it to President Obama for his signature. The conference report on financial regulatory reform cleared the House earlier this month by 237-192 (see NGI, July 5).
Obama said he was “grateful” to the three Republicans, who “put politics and partisanship aside,” to vote for the financial reform bill.
The legislation, which came nearly two years after the collapse of banks and Wall Street investment houses, calls for over-the-counter (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 provides a narrowly crafted clearing/trading 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 gain.
Oil and natural gas producers, large industrial customers and manufacturers, as well as agricultural interests, airlines and others, fought to win the exemptions. But they do have some concerns with the final bill.
“We’re pleased that Congress recognized the critical role of the over-the-counter market to a healthy and liquid energy market. Energy consumers will benefit from the bill’s exclusion of commercial end-users from mandatory clearing requirements, as well as language providing a de minimis exception for swap dealings,” said Skip Horvath, president of the Natural Gas Supply Association.
“However natural gas suppliers have serious concerns about the potential for unintended consequences resulting from this legislation if regulators 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,” he said.
Darrin Ihnen, president of the National Corn Growers Association, expressed similar concerns, saying “higher margin requirements are likely to be borne by corn farmers in the form of higher input costs and tighter credit.”
This marks the first time that OTC derivative transactions would be regulated by the federal government. Some lawmakers — including Sens. Maria Cantwell (D-WA) and Dianne Feinstein (D-CA) — have pushed for this reform for years.
Derivatives are financial instruments whose price depends upon or is derived from one or more assets, such as energy. Their value is determined by fluctuations in the underlying value. They are mostly used to hedge commercial risk but also can be used for speculative purposes. Some derivatives, such as agricultural commodities, are already traded on regulated exchanges. But OTC derivatives are traded off-exchange and out of the purview of the Commodity Futures Trading Commission. Misuse of derivatives was blamed in part for the financial crisis of 2008.
Specifically, the exemptions would apply to end-users (and their affiliates) that use OTC derivatives to hedge the risk associated with commodities, as well as the manufacturers of goods, and they would apply to a broad array of commodities, including oil, natural gas, electricity and coal.
CFTC Chairman Gary Gensler applauded the passage. “The Wall Street reform bill passed today is historic and comprehensive. Over-the-counter derivatives dealers will — for the first time — be subject to robust oversight for their derivatives activities. Standardized derivatives will be required to trade on open platforms and be submitted for clearing to central counterparties. This will greatly improve transparency and lower risk in the marketplace. I look forward to the President signing this crucial legislation.”
Gensler added that the CFTC “stands ready to implement” the legislation “to best protect the American public.”
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). This provision was widely opposed by Republicans, who were unsuccessful in a concerted campaign to strike it, and the large Wall Street banks.
The bill would refuse the banks access to Federal Deposit Insurance Corp. (FDIC) guarantees and the Federal Reserve Bank discount window in connection with their trading of derivatives.
Lincoln’s spin-off language also raised concerns 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 2,300-page bill also changes the rules for mortgage lending with the goal of making sure that banks give loans only to people who can afford to repay them. It creates a new agency to guard consumers in their financial transactions. Its myriad of provisions will spur a host of federal agencies into writing the regulations to bring an entirely new financial regime into being.
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