Yesterday, after holding a markup this week, the Senate Committee on Agriculture, Nutrition and Forestry approved, by a 13-8 vote (with all Democrats and Republican Senator Chuck Grassley voting in favor), the Committee’s draft over-the-counter (OTC) derivatives legislation that was unveiled late last week. The Senate Agriculture Committee voted down, 9-12, a substitute amendment offered by Committee ranking member Saxby Chambliss (R-GA), which would have replaced the bill’s language with the text of a bipartisan draft the Committee had been working on before negotiations between the political parties stalled.
Various amendments were passed during the markup session, the most significant of which include the following:
- Conflicts of interest: To address concerns regarding bank influence over clearinghouses, the CFTC would be authorized to establish limits on “control” exercised by banks, swap dealers and other financial institutions over clearinghouses.
- Foreign exchange swaps and forwards: The U.S. Treasury Department would be authorized to exempt foreign exchange swaps and forwards from the clearing and exchange reporting requirements, if it determines that they should not be treated as "swaps" and that they are not structured to evade such requirements.
- End-user exemption: While the central clearing mandate would not apply to commercial entities, such as manufacturers and distributors, to the extent they use OTC derviatives to hedge commercial risk, such entities may voluntarily submit their OTC derivatives trades to clearinghouses. Additionally, an affiliate of such a commercial entity would also be covered by the end-user exemption if the affiliate is acting on behalf of the commercial entity and is not a swap dealer or major swap participant.
This draft legislation will likely be combined with the broader financial reform legislation approved by the Senate Banking Committee, which the full Senate is expected to begin considering as early as next week.
U.S. Treasury Secretary Timothy Geithner applauded the Committee’s passage of the bill, stating that the bill would “bring derivatives trading out of the dark, provide strong oversight of market participants, and combat fraud, abuse and manipulation.” Additionally, at a speech today before the International Swaps and Derivatives Association, Deputy Treasury Secretary Neal Wolin reiterated the Obama administration’s position to “oppose efforts to weaken or undermine the strong regulatory framework” that the Senate Banking Committee and the Senate Agriculture Committee have put forward.