Financial Regulatory Forum

1-Year after slump, US lawmakers begin swaps reform

October 14, 2009

   By Rachelle Younglai and Charles Abbott
   WASHINGTON, Oct 13 (Reuters) – One year after financial markets faltered worldwide, U.S. lawmakers are determined to write a softer package of regulatory reforms than those requested by the Obama administration.
   “End users” such as airlines and utilities would not be required to process their swaps through clearinghouses, for instance. Nor would banks be required to offer “plain vanilla” versions of financial products, such as mortgages with simple terms.
   Both ideas were part of a panoramic set of reforms proposed by the White House.
   Another administration proposal, the creation of a systemic risk regulator, is foundering. When Congress convened in January, regulatory reform was a top priority.
   The House Financial Services Committee planned to meet, beginning on Wednesday, to draft legislation to bring over-the-counter derivatives under U.S. regulation, to create an agency to protect consumers from risky financial products, and amend the fair-credit reporting and truth-in-lending laws.
   Chairman Barney Frank has a target to bring a reform package to a vote on the House floor in November. After this week’s sessions, he plans to “mark up” provisions on hedge funds, insurers and brokerages next week — on Oct 21 and 22.
   Treasury Secretary Timothy Geithner said Frank has set an ambitious timetable for passing legislation.
   “I think we’re making a lot of progress, I think momentum is now with Chairman Frank and (Senate Banking) Chairman Christopher Dodd and, as the president said last week, it’s very important that we try to get this done this year,” Geithner told reporters on Tuesday.
  
   NO ‘PLAIN VANILLA’ RULE
   The legislation under consideration in the House would toughen U.S. financial regulation, although not as far as the administration wants.
   Frank said he expected “significant change” to his outline to regulate the $450 trillion market in over-the-counter (OTC) derivatives. His plan would exempt end users from sending their swaps through clearing. A U.S. futures regulator said the bill might unintentionally exempt large swaps users if they say they use derivatives as a risk management tool.
   End users, who include manufacturers and distributors, say it is common to pledge assets as collateral in a deal and it would be a burden to post cash as a reserve.
   The administration says all “standardized” OTC derivatives should go through clearing and all cleared swaps should trade on regulated exchanges. It says clearinghouses play a vital role in stabilizing markets by assuring payment and making public the terms of trade and names of who made a deal.
   During a hearing last week, Frank said there would be a presumption that standardized contracts would go through clearinghouses, but it would not be an iron-clad rule. By one estimate, 60 percent to 80 percent of OTC derivatives are standardized.
   A draft circulated by Frank would give the new consumer agency broad powers to examine all financial firms, to set compensation practices rules for their executives and to create a central database of consumer complaints.
   Financial firms strongly opposed the administration’s proposal that banks offer plain vanilla versions of their products. The draft would not require that step.
   Four large banks control over 90 percent of the U.S. derivatives market: JPMorgan Chase <JPM.N>, Goldman Sachs <GS.N>, Bank of America <BAC.N> and Citigroup <C.N>.
   One type of derivative, credit default swaps, is widely blamed for amplifying economic distress last fall and nearly toppling insurer AIG Inc <AIG.N>.
  A bill pending in the House Agriculture Committee, which oversees the futures market, also would exempt end users from clearing. The bill also would let U.S. regulators set position limits for physically deliverable goods — such as grains and oil — and set aggregate limits across markets on look-alike swaps that affect futures prices. (Writing by Charles Abbott. Additional reporting by Glenn Somerville: Editing by Chizu Nomiyama and Jan Paschal) ((chuck.abbott@thomsonreuters.com; +1 202 898 8319)) Keywords: FINANCIAL REGULATION/USA 
  
Tuesday, 13 October 2009 23:37:45RTRS [nN13192342] {C}ENDS

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