Firms ranging from airlines to agribusiness would be exempt from new rules on compulsory clearing of derivatives transactions under a bill in Congress aimed at tightening oversight of the financial system.

The draft bill from Representative Barney Frank, chairman of the House of Representatives Financial Services Committee, was being circulated among lawmakers on Monday amid concern that an effort to regulate the over-the-counter (OTC) derivatives market could hurt nonfinancial firms that use it.

The $450-trillion OTC derivatives market, used to hedge against risk and speculate on prices, is widely blamed for amplifying the 2008-2009 financial crisis and authorities worldwide are debating approaches to regulating it.

Nonfinancial firms ranging from rural electric cooperatives to airlines have voiced concerns about capital and liquidity constraints they might face if they too had to front collateral to meet margin requirements involved in centralized clearing.

Frank's bill exempts derivative swaps from new rules requiring centralized clearing, meant to bring more visibility to the market, if one of the counterparties to the swap is not a swap dealer or major market participant. Exempted transactions would have to be reported to authorities, under the bill.

In late August, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler, whose agency will play a key role in policing OTC derivatives, proposed more OTC derivatives face mandatory clearing, including non-financial firms or so-called end users.

Frank said last week his committee will deal in mid-October with OTC derivatives legislation. He predicted the panel would move a bill to the House floor by the end of the month. His committee will hold a public hearing on Wednesday on reform of the OTC derivatives market. Witnesses will include Gensler.

The Senate has not yet taken up the issue, on which debate is likely to continue for several months.

In addition to exempting some end users from compulsory clearing, the Frank bill would empower regulators to ban swaps deemed abusive or bad for market stability and participants.


Further, it would require the CFTC to make public aggregate data on swap trading volumes and positions. It would authorize the CFTC to set position limits on commodity contracts, and on swap contracts that perform or affect a significant price discovery function, said a bill summary obtained by Reuters.

In deciding if a swap has a price-discovery function, the CFTC would have to look at price linkage, arbitrage and other factors, while the agency could exempt any swap or transaction from position limit requirements, the summary said.

The Securities and Exchange Commission (SEC), another key regulator, could set limits on the size of positions in any security-based swap, with similar latitude on exemptions.

The SEC would also have to publicize aggregate data on security-based swap trading volumes and positions.

The Frank draft begins to narrow the terms of a months-old debate about how to categorize portions of the sprawling OTC derivatives market and what to do with each category.

This is the best job they've done at defining some of the terms we've been talking about since summer, said Kevin McPartland, senior analyst at TABB Group in New York.

He said lawmakers want to minimize systemic risks to the economy from OTC derivatives, but avoid imposing unneeded costs on U.S. corporations that are not central to those risks.

That's the crux of all of this, trying to prevent and find systemic risk before it happens, McPartland said.

Requiring central clearing of all derivatives market contracts could tie up valuable capital and constrain the liquidity of companies that use the contracts to hedge their businesses, derivatives users and dealers have warned.

Companies use OTC derivatives to customize hedges to their specific exposures when exchange-traded products, which are more standardized, do not reflect their actual risks.

Collateral, also known as margin, is posted against these contracts to protect against risk of a counterparty failing.

In many cases, companies secure derivative trades with property or other assets. Clearinghouses, however, would require posting of liquid collateral such as cash or short-term government debt, which could come at a much higher cost.

(Additional reporting by Charles Abbott, with Karen Brettell and Jonathan Spicer in New York, and Huw Jones in London; Editing by Andrew Hay)