Derivates Overhaul Legislation on the Move

The financial derivatives market looks to be headed for government regulation “for the first time.” At least, that’s if the Obama administration and Congress have anything to say about it.

Congressional Quarterly (CQ) Weekly has a report about recent legislative action taken by the House of Representatives Financial Services Committee (FSC), and as Benton Ives and Phil Mattingly report, the FSC moved ahead with “the first parts of the Obama administration’s plan to overhaul the nation’s financial regulations” by approving legislation to regulate the derivatives market.

One of the interesting things about the derivatives market is congressional committee jurisdiction, as both the FSC and the House Agriculture Committee share jurisdiction over the derivatives market. This means to get a bill approved by both the administration and members of congress, committee chairman Barney Frank and Collin Peterson are going to have to come to an agreement on some issues as the House Agriculture Committee is moving forward with its own plan. Chairman Frank’s committee started crafting HR 3126, which would “create a new Consumer Financial Protection Agency [.]” The FSC work is reported to continue this week.

As Ives and Mattingly report, “Crafting the bill has been a delicate balancing act for House Financial Services Chairman Barney Frank, D-Mass., as the White House has pushed for tougher regulations while industry groups have complained that the new rules could end up hurting business.”

The derivatives market is a $580 trillion over-the-counter derivatives market; yet, despite the value of the market, many of its activities are not subject to transparency and government oversight. As CQ reports, “many trades and contracts are made privately between individual parties and regulation is virtually nonexistent. Companies buy derivatives, which function in many respects as insurance, to protect themselves against interest rate fluctuations, fuel price spikes and other business risks.”

The FSC bill, which was voted out of committee by 43-26, along with the Agriculture Committee bill will both, presumably, be part of the legislative-regulatory overhaul hoped to be passed on the House floor in November.

“The bill’s primary mechanism for reducing risk would be to require that many derivatives transactions be processed through a third-party clearinghouse. If a clearinghouse accepts a derivative contract after examining the particulars, it would guarantee that both the seller and buyer make good on the deal.” According to the CQ story, both the administration and the Agriculture Committee would prefer boosting transparency by increasing trading on regulated exchanges in the derivatives market, rather than creating a new federal agency.

Derivatives legislation is coming, its complex, and it involves a lot of issues. To read the CQ article please click here. (Log in required)

Posted: 10/19/09