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Producers Defend Derivatives Clearing Exemption as Bill Nears Passage
As the U.S. House moved toward debate and a possible vote this week on financial market reform, including moving a large part of over-the-counter (OTC) derivatives trading onto exchanges, oil and gas producers warned that unless language excluding commercial traders from compulsory clearing is retained, it “would cost the energy industry alone tens of billions of dollars.”
Mandatory exchange trading would “effectively drive smaller participants out of the market and centralize risk,” said R. Skip Horvath, president of the Natural Gas Supply Association (NGSA).
In a letter to House Speaker Nancy Pelosi (D-CA) and the committee leaders who will be bringing a bill to the floor this week, NGSA and the American Exploration and Production Council (AXPC), warned that “mandating centralized clearing and margins is a recipe for unintended negative economic consequences.”
The groups said OTC energy derivatives used for hedging should be explicitly exempted from mandatory clearing requirements because without the exemption the legislation would “place an additional cash burden specifically on U.S. energy exploration and production that could reasonably estimated at around $100 billion, meaning that less capital would be available for drilling.” Overall forced exchange trading would tie up $900 billion in the economy, the producers said.
The broad-based financial reform legislation could come to the House floor as early as Wednesday with a possible vote by the end of the week. The Senate, however, is not expected to act on it until next spring.
While the most recent bills in the House and Senate included exemptions for commercial traders (that is, producers and end users who are hedging physical purchases) there is expected to be active debate with possibly changes on the House floor. “Our concern is there could be a number of attempts to narrow the exemption. We want to make sure the exemptions are maintained,” said Jenny Fordham, NGSA director of energy markets and government affairs. Fordham said NGSA was not taking a position on the overall requirement for exchange trading of derivatives.
The legislation voted out of the House financial and agricultural committees proposes to exempt end-users, such as energy producers and consumers, from the clearing/trading requirement if they use derivative products to hedge commercial risk. An exemption would not extend to a swap dealer or major swap participant, such as a financial institution (see Daily GPI, Nov. 11).
However, there reportedly are active behind-the-scenes negotiations going on before the measure hits the floor. One possible hang-up revolves around the question of a mixed transaction; i.e., if a commercial trader was on one side of the transaction and a noncommercial trader was on the other, would the trade have to be cleared? In one version of the legislation it would.
Analysts have estimated that the big losers from transparent clearing will be large banking and trading firms such as JP Morgan Chase, Goldman Sachs, Bank of America, Citibank and HSBC, which process trades and profit on the non transparent gap or bid-ask spread between what they charge customers and what they pay to hedge the trades.
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