Full House Vote on OTC Derivatives Rules Expected Next Month
October 19, 2009
The full House is expected to vote in November on a final bill to regulate over-the-counter (OTC) derivatives, after the House Financial Services Committee on Thursday approved its own version, 43 to 26, voting mostly along party lines.
House Speaker Nancy Pelosi is expected next month to combine two approaches - the financial committee bill with one pending in the House Committee on Agriculture. The Ag committee votes Wednesday on its version.
The Over-the-Counter Derivatives Markets Act of 2009 approved Thursday by the House Financial Services Committee would make the largest dealers and financial customers in the OTC markets clear derivatives contracts considered "standardized" through a central clearinghouse.
The official summary says the bill "provides a mechanism to determine which swap transactions are sufficiently standardized that they must be submitted to a clearinghouse" but there is no description of the mechanism. The marked-up version of the bill was not available at press time.
For transactions considered "clearable," clearing is required only if "both counterparties are either dealers or major swap participants." All standardized swap trades between dealers and major swap participants "must be traded on an exchange or electronic platform," the committee said.
Trades in standardized swaps that involve parties which are "hedging for commercial risk" are not required to be cleared. These and any such so-called "customized" transactions must be reported to a trade repository, the statement said. Reporting and recordkeeping is required for all OTC derivative trades, the committee said.
Non-financial "corporates" last year made up only a tiny 1.2 percent of the $41.9 trillion in total notional amount of credit default swaps (CDS) outstanding, according to the Bank of International Settlements. Nonetheless, corporate derivatives users have lobbied for exemptions from collateral, margin and other requirements in emerging derivatives rules.
The financial committee bill said clearing firms must obtain approval from either the Commodity Futures Trading Commission or the Securities and Exchange Commission - "before a swap or class of swaps can be accepted for clearing."
Bloomberg reported the bill would prohibit major swaps dealers from collectively owning more than 20 percent of a swaps clearinghouse. Dealers will next year share 50 percent of the profits in the leading CDS clearinghouse, New York-based ICE Trust, a subsidiary of the IntercontinentalExchange.
Derivatives legislation decided on by both houses may not reach the desk of President Obama until next year. The Senate, whose schedule has been overtaken by health care reform, has yet to move on a derivatives bill filed Sept. 22 in the chamber's banking committee.
