Tomorrow, the U.S House of Representatives is scheduled to vote on H.R. 2454 - the American Clean Energy and Security Act of 2009. This legislation, commonly referred to as the "Cap and Trade Bill," was introduced earlier this year by Energy and Commerce Committee Chairman Henry Waxman (D-CA) and Select Committee on Energy Independence and Global Warming Ed Markey Chairman (D-MA).

Though this bill primarily is concerned with climate change matters, it contains several provisions which relate to the OTC derivatives market as a whole. These provisions go much further than OTC derivatives provisions of the Obama Administration's White Paper.

If enacted, H.R. 2454 could dramatically impair the OTC derivatives market.

Under the bill:

  • All OTC derivatives, not just standardized derivatives, must be cleared through a clearinghouse unless the CFTC (Commodity Futures Trade Commission) grants an exception. The White Paper would permit non-standardized trades to be conducted privately, with certain safeguards. Clearinghouses have suggested that they would decline to clear certain non-standardized trades, so this provision could limit the types of derivatives available in the market.
  • Entering into a credit default swap (CDS) would be 'unlawful' for any person unless the person owns the referenced security, would experience a loss if a credit event occurs and meets certain minimum capital requirements. Market participants have stated that restricting the CDS market in this manner would eliminate the market entirely. The White Paper does not ban CDS.
  • Preemption of state bucketing laws would be eliminated for so-called naked CDS. The White Paper does not eliminate this preemption.

Although the outcome of the vote on this legislation is still very much in doubt, the bill raises significant issues for the derivatives market, particularly given the speed at which this bill has been moving.