US Senate mulls sweeping OTC derivatives regulation
Representatives from US energy companies warned lawmakers this month against regulating the over-the-counter (OTC) derivatives market, as proposed in the sweeping financial reform bill introduced by Chris Dodd, who is chairman of the Senate’s banking committee.
European traders are keeping a close eye on possible US changes to regulation in case similar measures should be tried in other regions.
In the 1,136-page draft bill, Dodd called for OTC derivatives to be cleared through centralised clearing houses and traded on exchanges, while also subjecting swaps to margin and capital requirements.
Testifying before the Senate committee in charge of changes to the US commodity exchange act, Mark Bolling, executive vice president for Southwestern Energy, raised concerns that contracts that cannot be centrally cleared would be subject to relatively high margin requirements, greatly affecting working capital.
As an energy company, Southwestern uses OTC derivatives to lock in natural gas prices, not for speculative purposes, Bolling said.
While the company supports lawmakers’ efforts to increase the overall transparency of OTC deals, Bolling stressed that any final bill should recognise the differences between the derivatives markets in the US.
“Energy derivatives did not cause the financial crisis of 2008; credit default swaps and subprime mortgages did,” he said.
As drafted, Dodd’s bill would require hedge funds worth more than $100m (€67m) to register with the Securities and Exchange Commission and disclose financial data as part of an effort to monitor systemic risk and protect investors.
Any party to a swap would have to submit the swap for clearing to a registered derivatives clearing organization.
Those organisations would then submit to the Commodity Futures Trading Commission for prior approval of any group, category, type, or class of swaps, for clearing, which the CFTC would make available to the public. Under the legislation, all swaps with the same terms and conditions would be fungible and could be offset with each other.
As part of the bill, end users would be excluded from clearing, margin and capital requirements. The legislative process for Dodd’s bill has just begun, with negotiations on amendments expected over the next several weeks.
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