Producers and large natural gas consumers are banking on the Senate making financial regulatory reform a priority when it returns this month, and on the final legislative product mirroring the House bill passed in mid-December, which exempted “end-users” and commercial traders who use over-the-counter (OTC) derivatives to hedge commercial risk from being centrally cleared and traded on regulated exchanges (see Daily GPI, Dec. 14, 2009).
“On of the highest priorities will be focused on financial reform in the Senate” in the new year, said Paul Cicio, president of the Industrial Energy Consumers of America (IECA), a group of large natural gas consumers. “I think that’s the hot issue right now.”
He expects the two jurisdictional committees — Senate Banking and Agriculture — to begin marking up a bill later this month. Although several regulatory reform measures have been introduced in the Senate, the committees likely will work off the draft of Senate Banking Committee Chairman Chris Dodd (D-CT), said Lee Fuller, vice president of government relations for the Independent Petroleum Association of America (IPAA) (see Daily GPI, Nov. 11, 2009).
Fuller expects the staffs of the two committees to begin negotiations on financial regulatory reform in earnest by next week. Hopefully banking and agriculture “will be walking in similar directions,” he said.
The Dodd draft would provide clearing-trading exemptions for end-users and commercial traders. Specifically it would allow the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to exempt a derivative swap from the clearing-trading requirements if one of the parties to the swap is not a swap dealer or a major swap participant (financial institution), or no derivative clearing organization will accept the swap for clearing.
The bill may run into problems in the banking committee as Sen. Richard Shelby of Alabama, the ranking Republican on the panel, and other Republican committee members do not support Dodd’s reform proposals.
The Coalition for Derivatives End-Users, of which the American Petroleum Institute is a member, has called the Dodd draft a “significant step backward from the positive and bipartisan work in the House on derivatives regulation.” It urged the Senate to follow in the House’s footsteps.
Speaking in Atlanta over the weekend, Federal Reserve Chairman Ben S. Bernanke called for strong regulatory reforms to prevent a repeat of the market crisis last year. “All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs.”
Derivatives, which were blamed in part for the financial meltdown in late 2008, are used by energy producers and large consumers to hedge against price fluctuations and other business risks. The Dodd draft, as well as the House legislation, would enhance the CFTC’s and the SEC’s authority over the heretofore unregulated $500 trillion OTC derivatives market.
Cicio said he expects financial reform legislation to be sent to President Obama probably in the March-April time period.
He said he wants the Senate bill to take its cue from the House measure, which gave more responsibility to the CFTC to oversee the OTC derivatives market and limit excessive speculation in the commodities markets. “We like the idea of clearing positions, but only speculative [ones]. Natural hedgers — companies who buy and sell gas, bona fide hedgers — should not be required to clear,” Cicio noted.
There was one part of the House bill that Cicio would like to see changed in the Senate. “The House bill gave too much flexibility to organizations, like hedge funds, to avoid clearing positions. That’s the part we don’t like.”
Fuller said the IPAA, which represents independent oil and gas producers, “was happy with what was finally done in the House bill,” specifically the treatment of end-users in clearing and trading. “We want to make sure we are able to operate as we historically have.”
Absent passage of financial regulatory reform, IECA’s Cicio said cap-and-trade legislation to reduce heat-trapping greenhouse gas emissions will not make it out of Congress. “They can’t do cap-and-trade without this bill” since the emission allowances will be traded on exchanges.
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