The Senate Banking Committee voted out legislation overhauling the financial reform in less than a half hour late Monday. The measure has drawn fire from the energy industry for its failure to provide end-users, such as industrial consumers and producers, with an exemption from the proposed clearing and trading requirements for the nearly $500 trillion over-the-counter (OTC) derivatives market.
“There was a pre-agreement on the part of the Democrats [on the committee] that they would not allow any amendments” during the mark-up process, said Paul N. Cicio, president of Industrial Energy Consumers of America (IECA). Committee Chairman Christopher Dodd (D-CT), the chief architect of the financial reform bill, let it be known that “it was going to be a straight up-and-down vote.”
The bill cleared the Senate banking panel by 13-10 along partisan lines. Republicans decided to save their amendments for the floor.
Dodd’s legislation calls for regulation of the heretofore unregulated OTC derivatives market. But unlike the measure passed by the House in December, it does not provide a blanket exemption for end-users from the requirement that OTC transactions be cleared by clearinghouses and traded on regulated exchanges.
Instead it gives the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission the authority 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, or no derivative clearing organization will accept the swap for clearing. In contrast, the House bill carves out a specific exemption for commodity trades involving end-users or commercial traders hedging commercial risk (see Daily GPI, Dec. 14, 2009).
“While [the American Petroleum Institute] supports efforts by Congress to improve transparency and accountability in U.S. financial markets, we are concerned by the lack of a strong, clear exemption for end-users from a clearing mandate and margin requirements,” said the API, which represents major oil and natural gas producers.
“Energy commodities account for about one half of 1% of the notional value of all over-the-counter derivatives. Still, these OTC derivatives serve an important function for the oil and natural gas industry and thousands of other businesses in the United States. They are used as a risk-management tool to hedge against fluctuations in commodity prices, interest rates and currency exchange rates, creating market stability and keeping costs down for businesses and the consumers who use their products,” the producer group said.
“With such a low percentage of total derivatives transactions, requiring end-users to exchange trade, centrally clear or margin their hedges will do nothing to address systemic risk. We remain hopeful a bipartisan agreement can be reached that preserves the ability for energy end-users to utilize OTC derivatives to hedge risk.”
Sen. Judd Gregg (D-NH), who supports an end-user exemption, hasn’t given up hope that he and Sen. Jack Reed (R-RI) will be able to develop a bipartisan proposal on regulation of OTC derivatives to replace Dodd’s language. “I am hopeful that we can continue to work toward developing a final bipartisan product in this area before any legislation reaches the Senate floor,” he said. Dodd charged Gregg and Reed with the responsibility of crafting a substitute proposal, but they have been unsuccessful so far (see Daily GPI, March 23).
“We’re disappointed because [Dodd’s] manager’s amendment did not provide an exemption for manufacturers from clearing and margin requirements,” Cicio said. “Our priority is [getting an exemption] from clearing,” he noted, but “we’re OK with [the requirement that] transactions be traded over exchanges.”
And as for the margin language in the Dodd bill, Cicio estimated that one manufacturer would be required to tie up $50-100 million in capital in margin requirements.
He argued that manufacturers account for only 5% of the derivatives traded and “do not pose a risk to the banking system.”
The energy industry’s attention will now turn to the Senate Agriculture Committee, which is expected to unveil its own OTC derivatives bill later this month or in early April. Susan Ginsberg, vice president of crude oil and natural gas regulatory affairs for the Independent Petroleum Association of America, said the producer group has received assurance from Agriculture Committee Chairman Blanche Lincoln (D-AR) and staff that their bill will provide an end-user exemption.
“We need to make sure it [Senate Agriculture] gets it right” when it comes to an exemption for end-users, Cicio said.
If the agriculture panel proposes an end-user exemption, the two Senate committees — Banking and Agriculture — will then have to get together to reconcile their proposals.
CFTC Chairman Gary Gensler, who is against any exemptions from regulation of OTC derivatives, applauded the committee’s action. The vote by the Senate banking panel “represents historic progress toward comprehensive regulatory reform of the over-the-counter derivatives marketplace.” He said he looked forward to working with Dodd, Lincoln and others in the Senate and House on legislation that “promotes transparency and lowers risk in the entire OTC marketplace.”
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