OTC derivative end-users exempted in draft US bill

October 5, 2009


WASHINGTON, Oct 5 (Reuters) – A wide swath of end-users of over-the-counter derivatives contracts would be exempted from new rules requiring centralized clearing under draft legislation circulating in the U.S. Congress on Monday.

The draft bill from Representative Barney Frank, chairman of the House of Representatives Financial Services Committee, comes amid growing concern an effort to regulate the OTC derivatives market could hurt nonfinancial firms that use it.

The draft exempts swaps from new rules meant to bring more visibility to the market if “one of the counterparties to the swap is not a swap dealer or major market participant.”

Rural electric cooperatives, natural gas distributors, airlines and agribusiness groups have all voiced concerns about being forced to front collateral required to satisfy margin requirements involved in centralized clearing.

The OTC derivatives market is widely blamed for amplifying the 2008-2009 financial crisis and authorities worldwide are debating approaches to regulating it.

The Obama administration earlier this year proposed clearing of “standardized” OTC derivatives and moving as much of them as possible onto regulated exchanges, while requiring only increased reporting for “customized” derivatives.

Clearinghouses mutualize risk, set margin requirements and make public the terms of trade.

In late August, Commodity Futures Trading Commission Chairman Gary Gensler proposed more OTC derivatives should face mandatory clearing, including end-users.
(Reporting by Kevin Drawbaugh and Charles Abbott)

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