A key U.S. congressional committee approved new rules for the largely unpoliced $450-trillion derivatives market on Thursday in a win for the Obama administration.
The House of Representatives Financial Services Committee voted 43-26, largely on party lines, in favor of the rules after months of lobbying by major banks and corporations that helped shape the legislation modified in recent days during House debate from an earlier administration proposal.
The vote marks a step forward in President Barack Obama's broad effort to tighten bank and capital market regulation to prevent a repeat of last year's financial crisis.
Committee Chairman Barney Frank tweaked his version of the administration's bill, seeking a balance between reducing the systemic economic risks posed by over-the-counter derivatives and preserving their role in risk-hedging done by companies as part of their normal business operations.
A parallel bill is in the House Agriculture Committee, where an aide said a vote may come next week. Frank and Representative Collin Peterson, chairman of the Agriculture Committee, would then seek to reconcile their bills.
Legislation has also been filed in the Senate, but financial reform there has moved very slowly.
A full House vote on a financial-reform package with at least a half-dozen measures is expected next month. The outlook was unclear in the Senate, where lawmakers are struggling to meet an end-of-the-year target for completing reforms.
We're still working on our package. We haven't gotten into concrete details in the Senate, Senator Richard Shelby, the top Republican on the Senate Banking Committee, told CNBC television on Thursday. It's a long way from being law.
Obama earlier this year proposed moving much of the trading of OTC derivatives onto exchanges or equivalent electronic platforms to encourage transparency and accountability in a market considered opaque and beyond the grasp of regulators.
OTC derivatives are financial contracts that trade off-exchange among the biggest financial institutions and end-users ranging from airlines to agribusinesses.
Goldman Sachs Group Inc
A large slice of the market involves financial firms placing bets on changes in interest rates, debt defaults and prices for commodities or stocks. But many businesses use derivatives to hedge against risks that can affect their operations, such as changes in fuel and commodity prices.
Lawmakers have tried to minimize the dangers to the economy posed by what is viewed as Wall Street's derivatives casino, without burdening corporate end-users, already struggling in the recession, with new costs and red tape.
In addition to more exchange trading, the administration and Democrats want more transactions routed through centralized clearinghouses that spread risk, set margin requirements and disclose trading terms.
In one change from an earlier bill, Frank's committee approved an amendment requiring that standardized contracts be traded on an exchange or equivalent electronic platform when the dealings involve speculation between financial firms.
Credit default swaps -- a derivative contract central to last year's financial meltdown and subsequent $180 billion taxpayer bailout of American International Group Inc
Agriculture's Peterson has circulated a draft exempting end-users from the clearing process. It would also require that swaps go through clearing if a clearinghouse will accept them, and that cleared swaps must trade on regulated exchanges or electronic platforms.
The Peterson plan would empower the Commodity Futures Trading Commission and the Securities and Exchange Commission to impose position limits -- a maximum market share -- on swaps to assure fair markets. The CFTC could also set position limits on physically deliverable commodities, such as oil.
(Reporting by Kevin Drawbaugh and Charles Abbott; editing by Jeffrey Benkoe)