US Rep. Frank seeks changes in derivatives bill

November 4, 2009

U.S. Representative Barney Frank (D-MA), Chairman of the House Financial Services Committee, listens to a reporter's question during the Reuters Global Financial Regulation Summit in Washington, April 28, 2009.     WASHINGTON, Nov 4 (Reuters) – The chairman of the U.S. House Financial Services Committee is seeking changes to draft legislation for the $450 trillion privately-traded derivatives markets, with the intent of making it harder for banks to avoid trading the contracts on exchanges.

Chairman Barney Frank said in a letter released on Wednesday that he plans to introduce amendments that would give the regulators, the Commodity Futures Trading Commission and the Securities and Exchange Commission, the decision over what contracts are eligible for central clearing, and thus required to be traded on exchanges.

Frank, a Democrat, is also seeking to tighten language over what companies may be exempt from centrally clearing their contracts, “to prevent speculators from masquerading as end-users.”

So-called end-users, which include companies that use derivatives to hedge against currency, commodity or other risks, have been exempt from the rules because of the additional cost central clearing could add to their business.

Regulators want the majority of derivatives to be cleared through central counterparties in order to reduce the systemic risks posed by the web of connections between large financial institutions trading the contracts.

Some regulators and observers, however, have expressed concerns that the legislation leaves gaps that could allow banks to limit the amount of contracts that are centrally cleared.

Critics say that banks want to protect the large margins they earn from trading derivatives, which benefit from opacity in the markets.

Frank also said he continues to support an amendment to the bill that would restrict ownership of a clearinghouse by financial firms to 20 percent, though he noted this measure has met some resistance on concerns it could limit the number of companies offering the service.

ICE Trust, which has a revenue sharing agreement with a group of large banks, has been the only company in the U.S. so far to clear credit default swaps, contracts that were central to spreading the risky loans that caused the credit crisis.

Jeffrey Sprecher, chief executive at InterncontinentalExchange Inc <ICE.N>, which owns ICE Trust, said last month that ICE may remove some decision-making power from banks, depending on final details of 20-percent provision.

He added, however, that the rule would be unlikely to have a major impact on the business.

Frank’s letter was sent to the heads of the CFTC and the SEC and asks for their help in crafting the amendments.
(Reporting by Karey Wutkowski in Washington and Karen Brettell in New York; Additional reporting by Jonathan Spicer; Editing by )
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