The OTC Derivatives Markets Act, HR 3795, that was favorably reported out of the House Financial Services Committee is a consensus-based piece of legislation representing significant input from moderate Democrats. Members of the New Democrat Coalition worked with Chairman Frank to bring this legislation to fruition. The legislation incorporates provisions from the Derivatives Trading Accountability and Disclosure Act HR 3300, which was backed by the New Democrat Coalition.
The House bill would exempt end users that use derivatives to hedge risk or engage in other risk management tools from margin or capital requirements. This is in keeping with the Coalition's goal of protecting end users seeking to hedge their risks. The legislation would also expand the definition of swap dealer to include entities that not only buy and sell derivatives but those that engage in trades. This provision will allow the prudential regulator to identify and address the derivatives trading activities of large financial institutions. The measure would mandate clearing for standardized derivatives products between major swap participants that pose a systemic risk to the financial system. This builds on the Administration's goal of reducing systemic risk to the financial markets, a goal also endorsed by the Coalition.
Rep. Michael McMahon (D-NY), a leader of the New Democrat Coalition, said that the legislation reported out under Chairman Frank's leadership addressing systemic risk in the OTC derivatives markers while preserving the OTC market for specialized products.
The House Agriculture Committee has also approved HR 3795, with multiple changes pursuant to a Manager's Amendment offered by Committee Chairman Collin Peterson. The Ag Committee changed the name of the legislation to the Derivative Market Transparency and Accountability Act of 2009. The Ag version of the legislation also provides an exemption for commercial end users to use derivatives to hedge their risk. It also establishes an SEC-CFTC bifurcated regime for the regulation of the OTC derivatives markets. The SEC would have exclusive jurisdiction over security-based swaps.
The Peterson amendment adds a new section to the legislation essentially prohibiting the federal bailout of a Securities Exchange Act derivatives clearing agency or a Commodity Exchange Act derivatives clearing organization.
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