A U.S. congressional committee started nailing down details of a bill to regulate over-the-counter derivatives on Wednesday, seeking to advance a key part of the Obama administration's broad plan to tighten bank and capital markets oversight.
After the worst credit crisis in generations, President Barack Obama and fellow Democrats want to rein in the $450-trillion OTC derivatives market that many claim amplified a crisis which drove the world financial system to the brink of collapse last year.
They face ferocious resistance from banks and Republicans seeking to protect profit margins in a market used to hedge against risk and speculate on prices.
The House Financial Services Committee opened a drafting session with comments by Democratic Chairman Barney Frank, who said the latest version of his committee's bill would make further concessions to firms ranging from airlines to agribusiness that are so-called end-users of derivatives.
Lawmakers are keen to minimize systemic risk to the U.S. economy from OTC derivatives but avoid imposing unneeded costs on U.S. corporations that are not central to those risks.
A vote could come later on Wednesday, although Thursday appeared more likely.
But the committee also was set to debate possible further changes to encourage more exchange trading of certain kinds of OTC derivatives -- a move that would align its bill more closely with one in the House Agriculture Committee.
MEETING OF MINDS NEEDED
Both panels are working on the issue and Frank said that there must be a meeting between himself, Agriculture Committee Chairman Collin Peterson, regulators and the administration once both committees are done and before any legislation comes before the full House for a vote.
Frank's committee is also expected to debate and vote on a bill to create a Consumer Financial Protection Agency, a new watchdog being proposed by Obama to shield consumers from deceptive mortgages and other financial products.
House leaders expect a package including the new consumer agency, OTC derivatives and several other proposals to go to the House floor for a vote in November. The outlook for a bill in the Senate, which has yet to produce a bill, is unclear.
Frank's committee has scheduled sessions next week to work on provisions on hedge funds, insurers and brokerages.
He said on Wednesday that the latest version of his committee's OTC derivatives bill would allow the use of non-cash collateral to meet margin requirements related to central clearing of derivatives.
Frank said the change to his earlier draft responded to concerns among derivatives end-users about posting collateral if they have to make wider use of central clearinghouses that demand more collateral to clear transactions.
Non-financial firms that use the OTC derivatives market fear they may face capital and liquidity constraints should they have to post cash collateral to clearinghouses that demand margin requirements and mutualize risk.
He also said the latest version would not empower the Commodity Futures Trading Commission or the Securities and Exchange Commission to ban abusive swaps.
The Obama administration has recommended all standardized OTC derivatives should go through clearing and all cleared swaps should be traded on regulated exchanges. It would put higher capital and margin requirements on customized contracts.
Frank has indicated he would tighten language in the draft to prevent large swaps users from evading regulation by declaring they use derivatives as a risk management tool.
(Additional reporting by Charles Abbott; Editing by Andrew Hay)