Gensler Falls Short of Derivatives Goals in House Legislation
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By Tina Davis Seeley and Theo Francis
Dec. 12 (Bloomberg) -- Gary Gensler, who helped lead the Obama administration’s push to rein in the $605 trillion over- the-counter derivatives market, fell short of some of his goals with the legislation passed by the U.S. House yesterday.
The derivatives measure, part of a broader overhaul of financial industry rules, contains exemptions that have been opposed by Gensler, chairman of the Commodity Futures Trading Commission. He praised the passage of the bill yesterday, while indicating he will continue efforts to shape the legislation.
“The bill comprehensively regulates swap dealers and major swap participants and lays out the framework for the use of clearinghouses and transparent trading facilities,” Gensler said in an e-mailed statement. “I look forward to continuing to work with Congress on this critical issue as the bill moves to the Senate.”
The House approved in a 223-202 vote the broad legislation that imposes stricter trading provisions in response to last year’s upheaval of U.S. credit and mortgage markets. Derivatives are financial contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather.
The legislation incorporates exemptions opposed in the past by Gensler, who urged “narrow” exceptions and called for rules to cover the entire derivatives marketplace.
“Gensler’s gotten more of a double or a triple than a home run, which still isn’t bad for a day’s work,” said Gary DeWaal, group general counsel in New York for Paris-based Newedge Group, which calls itself the world’s largest futures broker.
Clearinghouses, Exchanges
Lawmakers on Dec. 10 voted down amendments to the bill that would have forced more company swaps transactions onto regulated trading systems, given the CFTC and other regulators authority to ban “abusive swaps,” and required corporate “end-users” to post margin or hold collateral against derivatives contracts.
The House legislation requires that standardized contracts be processed by clearinghouses and executed on regulated exchanges or swap execution systems. Clearinghouses impose capital and margin requirements for trading.
Commodity-based businesses such as manufacturers, airlines and energy producers that use derivatives would be exempt from the clearinghouse requirement if they can show they are using the contracts to hedge operational risk. Transactions by these end-users would, for the first time, have to be reported to regulators.
Gensler has repeatedly called for Congress to make derivatives regulations as tough as possible.
“We need to bring as many standard transactions to central clearinghouses as possible, regardless of what type of party stands on either side of the trade,” Gensler said in a Nov. 18 speech at the Exchequer Club of Washington.
Trading With Customers
The chairman said financial firms and hedge funds should be subject to clearing requirements even when trading with end- users that aren’t.
“While big Wall Street banks would be subject to the requirement when trading with each other, those same Wall Street banks would be exempt when trading with many of their customers,” Gensler said in a Dec. 3 speech at a Consumer Federation of America conference. “Exempting a large class of transactions, even those with hedgers or other end-users, would reduce the amount of information available to the public and market participants.”
House Agriculture Committee Chairman Collin Peterson, a Minnesota Democrat, said in a statement before the vote that the exemptions in the House-passed bill “will hold swap dealers like big banks accountable to new standards for capital, margin and business conduct requirements and will benefit end-users’ ability to continue to effectively hedge their price risk by not submitting them to onerous cash collateral requirements.”
Bank Limits
The end-user exemption and limits on which instruments must be cleared aren’t critical to the main goals of the new derivatives legislation, which are to improve regulators’ insights into the scope of the market and prevent systemic risk, said Joel Telpner, a New York-based partner in the derivatives and structured finance practice of the law firm Jones Day.
Letting end-users report trades, in lieu of forcing them to go through clearinghouses, “recognizes that you don’t have to clear it just to get transparency or adequate margin,” he said.
The measure approved yesterday also includes a 20 percent limit on the stake banks can hold in new companies that execute or guarantee trades in the market.
To contact the reporters on this story: Tina Seeley in Washington at tseeley@bloomberg.net; Theo Francis in Washington at tfrancis14@bloomberg.net.
Last Updated: December 12, 2009 00:00 EST
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