U.S. House panel passes derivatives overhaul in big step for Obama

By Reuters Staff
October 16, 2009

By Kevin Drawbaugh and Charles Abbott

WASHINGTON, Oct 15 (Reuters) – The Obama administration scored its first financial regulation reform victory in months on Thursday when a U.S. congressional committee approved new regulations for over-the-counter derivatives.


In a 43-26 decision, the House of Representatives Financial Services Committee voted in favor of slapping new rules on the largely unpoliced $450-trillion OTC derivatives market, widely blamed for amplifying last year’s financial crisis.

The committee’s bill strives to balance a desire to curb the kind of speculative market excess that led to last year’s AIG disaster, with preserving the market’s useful role in helping corporations hedge against operational risks.

That effort, which meant watering down parts of an earlier administration proposal, got mixed reviews.

“It does not do enough to protect taxpayers and our economy,” said Heather Booth, director of Americans for Financial Reform, a consumer advocacy group.

“Unregulated derivatives trading was a major cause of the economic crisis … But the big Wall Street firms who make tens of billions of dollars from these trades — and then left the taxpayers to clean up their mess — want to continue with business as usual,” Booth said in a statement.

Commodity Futures Trading Commission Chairman Gary Gensler called the committee’s action “a significant step,” but added he wants to work with lawmakers toward legislation “that covers the entire marketplace without exception.”

The committee delayed until next week voting on a bill to create a Consumer Financial Protection Agency, but not before amending it to ease the impact of CFPA inspections on small banks and credit unions. Proposed by the administration, the CFPA would regulate mortgages and other financial products.

The OTC derivatives vote showed the Obama administration’s financial reform drive gaining headway on Capitol Hill.

It follows months of drift and closed-door negotiations with bankers and Republicans who are fighting to protect profit margins from the Democrats’ drive for tougher rules.

Top White House economic adviser Lawrence Summers urged Wall Street firms to get behind the legislation, especially institutions that have received government bailouts.

“We welcome input from anybody who can help us get it right,” Summers said in a blog posting on the White House web site. “But we are not interested in compromising with those who see these issues through the prism of their continued ability to operate within the profitable, but unacceptable, paradigms of the past.”

Thursday’s vote was an incremental step in the reform of OTC derivatives — financial contracts that trade off-exchange among the biggest financial institutions and “end-users” ranging from airlines to agribusiness.

The House Agriculture Committee must still vote, likely next week, on its own, somewhat tougher version of OTC derivatives reform.

FULL HOUSE VOTE NEXT MONTH

A full House vote on financial reform is expected next month. Leaders hope to bring one bill to the floor covering OTC derivatives, a financial consumer watchdog agency, bank supervision, systemic risk regulation, hedge fund oversight and new powers for dealing with failing financial firms.

(For related story, see FACTBOX-Major U.S. financial regulation reform proposals, click on [ID:nN07487474])

Parallel OTC derivatives legislation has been filed in the Senate, but financial reform is moving very slowly there.

“We’re still working on our package. We haven’t gotten into concrete details in the Senate,” Senator Richard Shelby, the top Republican on the Senate Banking Committee, told CNBC television on Thursday. “It’s a long way from being law.”

Obama in May signed into law hard-hitting new rules for the credit card industry. The House has approved bills to put new curbs on executive pay and to reshape the student loan market, but the Senate has not yet acted on those two initiatives.

The financial services committee was set to vote next week on setting up a proposed Consumer Financial Protection Agency.

A dozen other proposed financial reform bills sent to Congress by Obama have been under debate for months. The House has a schedule for dealing with them, but not the Senate, which has been consumed for much of 2009 with healthcare reform.

The administration is under international pressure to advance financial reform. The G20 group of countries has agreed that OTC derivatives should trade on an exchange or platform, where appropriate, and clear centrally by the end of 2012.

The EU’s European Commission is due to come out with its own policy thinking on OTC derivatives next Tuesday.

Obama earlier this year proposed moving much of the trading of OTC derivatives onto exchanges or equivalent electronic platforms to encourage transparency and accountability in a market considered opaque and beyond the grasp of regulators.

OTC derivatives are financial contracts that trade off-exchange among the biggest financial institutions and “end-users” that range from airlines to agribusinesses.

Goldman Sachs (GS.N), JPMorgan Chase (JPM.N), Citigroup (C.N), Bank of America (BAC.N) and Morgan Stanley (MS.N) dominate the derivatives market and reap huge profits from it.

A large slice of the market involves financial firms placing bets on changes in interest rates, debt defaults and prices for commodities or stocks. But many businesses use derivatives to hedge against risks that can affect their operations, such as changes in fuel and commodity prices.

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