Senate Ag Finishes Derivatives
Today the Senate Agriculture Committee, led by Chairman Blanche Lincoln (D-AR), completed its work on the over-the-counter derivatives section of financial regulatory reform. By a vote of 13 to 8, the committee adopted the Wall Street Transparency and Accountability Act. Sen. Charles Grassley (R-IA) was the only Republican to join the committee Democrats in voting for the bill.
The Senate is set to vote to end the filibuster on the Senate Banking Committee bill next Monday evening, which would allow Banking Chairman Chris Dodd (D-CT) to bring the legislation to the floor next Tuesday, April 27. The Monday night vote is dependent on getting at least one Republican to break ranks and vote for cloture, which would end the delay. No one knows which Republican will cave, but some likely candidates are the moderate Senators from the Northeast: Olympia Snowe (R-ME), Susan Collins (R-ME), or Scott Brown (R-MA).
We expect Sen. Dodd to incorporate Lincoln’s Wall Street Transparency and Accountability Act into the financial reform package he brings to the floor. Following are a few shorthand highlights of the Lincoln bill, but click here for the Senate Agriculture Committee’s more extensive summary and the most up to date bill language.
Lincoln Bill Highlights --
- The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) would be able to write rules requiring intermediaries to set up processes for avoiding conflicts of interest.
- Clarifies the commercial end user definition – clearly establishes that manufacturing goods would be covered in the end user clearing exemption.
- Clarifies covered commodities in the commercial end user exemption – e.g. a business engaged in gasoline and propane production and marketing would qualify for the commercial end-user exception from mandatory clearing.
- End User Clearing Exemption – Captive finance arms of commercial end user parents can qualify for the end user exemption if they are hedging on behalf of their parent companies.
- Swap Data Repositories – swap data repositories must have systems in place to track uncleared swaps, including those not cleared due to the end-user exemption, in order for the CFTC to monitor and analyze the use of the end user exemption.
- CFTC given the authority to investigate the usage of the end user clearing exemption and related hedging activity.
- Grandfather provision – existing, long-term swap contracts would not be changed by the new law.
- Mandates the CFTC to set aggregate position limits.
- Clarifies the CFTC’s authority over retail commodity transactions, including metals and diamonds, and eliminates the identified bank product exception.
- Whistleblower protection – sets up at the CFTC a program similar to the whistleblower program at the SEC.
- Treasury would have regulatory authority over foreign exchange swaps unless the Treasury Secretary determines that they should not be regulated.
- Establishes a permanent Energy and Environmental Markets Advisory Committee.
- Derivatives Clearing Organizations – updates operational standards and brings them more in line with international standards.
- Portfolio Margining – the CFTC and SEC will have to study and establish risk-based margin rules that cover entire portfolios of securities, futures, and swaps rather than position by position determinations.
- Hybrid Product Approval – the CFTC and SEC will be able to review, approve, and allocated oversight of derivative products that have both securities and futures components.
- CFTC would be prohibited from approving gaming/gambling contracts and directed to scrutinize certain “event contracts” carefully.
- CFTC must write rules that require real-time price transparency for certain swaps.
- Financial Integrity of Clearinghouses – When writing rules to address the implementation of core principles, the CFTC must consider the overarching financial integrity of clearinghouses.
- Carbon Trading -- the CFTC and other regulators are directed to study the feasibility of regulating carbon trading and report to Congress.
