U.S. Senate agriculture panel head plans own US swaps reform bill

November 18, 2009

Senator Blanche Lincoln (D-AR) (C) speaks about the 2007 budget in a news conference at the Capitol in Washington, February 9, 2006. Also pictured are Senate Majority Leader Harry Reid (D-NV) (L) and Senator Kent Conrad (D-ND).   REUTERS/Jonathan Ernst WASHINGTON, Nov 18 (Reuters) – The U.S. Senate Agriculture Committee chairman said on Wednesday she intends to draft legislation “that will bring much-needed transparency and accountability to the over-the-counter derivatives market.”

Chairman Blanche Lincoln outlined her plan during a hearing on proposals to bring the $450 trillion market in OTC derivatives under federal regulation. The Senate Banking Committee chairman unveiled a panoramic overhaul of financial regulation, including derivatives on Nov. 10.

Lincoln said her bill would “address issues such as prudential regulations related to enhanced capital and margin requirements, clearing of over-the-counter transactions, as well as a host of other matters including forex (foreign exchange) trading and foreign boards of trade.”

The Republican leader on the committee, Saxby Chambliss, said some regulatory changes are necessary and called for more reporting of trade data as part of more transparency in the now “dark” market.

The Obama administration proposed a package of OTC reforms last summer. It would require “standardized” OTC transactions to go through clearinghouses and to trade on federally regulated platforms. Customized contracts would be subject to higher margin and capital requirements and would be reported to so-called trade repositories.

Chairman Gary Gensler of the Commodity Futures Trading Commission said, “I believe regulators should have clear authority to make the determination” of which OTC transactions must go through clearing.

The presumption is to get as many transactions as possible to go through clearing and trade on exchanges, he said.

Clearinghouses, by assuring payment, reduce systemic risk, said Gensler, and on-exchange trading will make public the terms of trade and participants.

A bill approved a month ago by the House Agriculture Committee would exempt from clearing commercial end-users, which vary from airlines and utilities to manufacturers. End users say they often pledge assets as collateral in their deals and do not have the cash on hand that a clearinghouse would demand as a reserve against default.

“This is very serious for our manufacturers,” said Sen Debbie Stabenow from Michigan, home to U.S. automakers.

Ford Motor Co treasurer Neil Schloss said the car maker used OTC derivatives to mitigate risks in global manufacturing — “we do not use derivatives to speculate.” Ford has about $108 billion in derivatives outstanding, mostly on interest rates, he said.

“Similar to other end-user corporations and manufacturers, we are concerned that imposing clearing, margin and capital requirements on end users would significantly increase our cash requirements and costs,” said Schloss.

Southwestern Energy Co. of Houston, a natural gas developer, and the American Public Gas Association, a natural gas distributor, said mandatory clearing would drive up their costs. “In essence, it’s punishing the victims,” said Jeff Billings, speaking for APGA.

End users exaggerate the possible costs of reforms, which “pale in comparison to the trillions of dollars of lost output and employment this crisis has caused, even for their own firms,” said Robert Johnson, on behalf of Americans for Financial Reform, a group that backs OTC derivatives reform.

Gensler argued against exemptions from clearing. If senators feel differently, he said, exemptions should be narrowly defined — “just to corporate end-users, not financial end-users, like hedge funds, who can afford to pay this (margin).”

While the House aims for a vote on financial regulatory reform this year, the Senate is in the early stages of developing legislation on the issue.

(Editing by James Dalgleish) ((chuck.abbott@thomsonreuters.com; Tel: +1 202 898 8319))

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