Democrats on the Senate Banking Committee were expected to hold a vote late Monday on legislation to overhaul the financial regulatory system. The bill was likely to include Committee Chairman Christopher Dodd’s (D-CT) existing proposal on regulation of the nearly $500 trillion over-the-counter (OTC) derivatives market. Sens. Jack Reed (R-RI) and Judd Gregg (D-NH) — whom Dodd had tasked with the responsibility of crafting substitute language on OTC derivatives regulation — said Friday they failed to reach agreement.

After Republicans agreed not to bring nearly 300 amendments that would have changed Dodd’s reform bill and slowed the mark-up process, the Senate banking panel — 13 Democrats and 10 Republicans — was expected to vote out the legislation along party lines, the Washington Post reported.

A Reed-Gregg amendment on OTC derivative regulation would not be part of the bill. “Over the course of the last 12 weeks Sen. Gregg and I had constructive discussions. But ultimately, we were not able to reach a comprehensive consensus that would fill dangerous gaps while allowing companies to safely use derivatives to hedge their risks,” Reed said. The two senators were charged with drafting an amendment on regulation of OTC derivatives for inclusion in the financial regulatory reform bill (see Daily GPI, March 16). The amendment would have substituted for Dodd’s existing language in the bill on OTC derivative regulation.

Both Reed and Gregg were said to support the need for greater regulation and transparency in the OTC derivatives market, but they reportedly were split on the issue of granting certain classes of customers exemptions from the new rules, which would require that OTC derivative products be centrally cleared and traded on a regulated exchange. End-users who use OTC derivatives to hedge commercial risk (large industrial customers and independent producers, for example) have asked that they be exempted from the new requirements.

Gregg indicated his support for an end-user exemption, said Susan Ginsberg, vice president of crude oil and natural gas regulatory affairs for the Independent Petroleum Association of America (IPAA). But Reed was against it.

Gregg said he and Reed had made “great progress” over the past months on proposals to reduce systemic risk in the OTC derivatives market, but “Chairman Dodd’s decision to move the mark-up forward leaves the effort incomplete.” However, “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.”

Reed said he believes the Senate banking panel needs to “move forward with Chairman Dodd’s [current] proposal to bring oversight and transparency to the derivatives market and curb reckless speculation.”

Dodd’s draft does not provide a blanket exemption to end-users. 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. It differs from the House financial regulatory reform bill, which passed in December and carves out a specific exemption for commodity trades involving end-users or commercial traders hedging bona fide commercial risk (see Daily GPI, Dec. 14, 2009).

“Right now regulators are utterly prohibited from overseeing the swaps market. That situation has to change and any agreement on derivatives must strengthen transparency, require use of clearinghouses, establish a clear pathway to placing suitable products on trading platforms, and provide stronger oversight of banks and other firms that comprise the largest parts of these markets,” Reed said.

“Markets work best when they are transparent and there are rules. That is why regulators, market participants and the public must have access to data on trades, including price and volume data. It is essential that any reform bill establish strong and sensible capital and margin requirements to prevent excessive risk-taking and impose new rules on these bankers to prevent them from taking advantage of companies or municipalities that use these products to manage their risks.”

IPAA’s Ginsberg was not overly optimistic that the Senate Banking Committee would craft end-user exemption. “We’re more hopeful on the Agriculture Committee side that there will be an exemption for end-users,” she said last week. The agriculture panel has jurisdiction over the CFTC.

The Senate Agriculture Committee is expected to unveil its own OTC derivatives bill late this month or in early April. The IPAA said it has received assurance from Agriculture Committee Chairman Blanche Lincoln (D-AR) and staff that their bill will provide an end-user exemption.

©Copyright 2010Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.