Yesterday, the House Agriculture Committee considered and approved H.R. 977, the Derivatives Markets Transparency and Accountability Act of 2009, as amended, by a voice vote at a full business meeting of the Committee. In his opening statement, Chairman Collin Peterson (D-MN) stressed the urgency to push legislation forward to address the “lack of transparency and effective oversight of regulated and unregulated derivates.” He also noted that changes exist in this bill from the previous discussion draft as a result of the feedback received during hearings last week. Further changes were made to an interim draft of the bill circulated earlier this week during the Committee mark-up session yesterday.
The proposed bill would impose new limitations on the activities of foreign boards of trade, require more robust reporting of market data, subject OTC transactions to recordkeeping requirements, and expand the full-time resources of the Commodity and Futures Trading Commission (CFTC). Additionally, in an effort to curb excessive speculation in the commodities markets, the bill would require the CFTC to adopt position limits for futures on physical (but not financial) commodities, limiting eligibility for hedge exemptions to bona-fide hedgers. Furthermore, the CFTC would be required to hold biannual hearings with respect to agricultural and energy commodities, whereby interested parties would have the opportunity to recommend position limits for these types of commodities.
With respect to the bill provision subjecting all prospective over-the-counter (OTC) transactions on financial commodities to clearing requirements, the Committee ultimately adopted language similar to that found in the initial discussion draft of the legislation, despite hesitancy about this provision expressed by various industry representatives last week at the hearings. The bill would require that all prospective OTC transactions be settled and cleared through a CFTC-regulated designated clearing organization or an SEC-regulated clearing agency. In adopting this language, the Committee rejected a proposal that would have exempted from mandatory clearing any such transaction which was reported to the CFTC. Instead, the bill provides that a transaction can be exempt only if the CFTC grants its approval based on specified criteria, including that the transaction be highly customized and infrequently traded, that it not serve a significant price discovery function, and that the parties to the transaction be financially strong.
In its most significant modification from the initial discussion draft, the Committee decided not to impose a ban on all “naked” credit default swaps (CDS). The initial draft of the bill would have required CDS protection buyers to hold the underlying instrument before engaging in CDS transactions. At last week’s hearings, this provision garnered heated debate between futures industry representatives and agricultural producers and energy end-user associations, and the revised provision arguably aligns more closely with the interests of the futures industry representatives. The provision ultimately adopted by the Committee with respect to CDS would authorize the CFTC, with the President’s approval, to suspend trading in CDS whenever an SEC short-selling suspension order is in effect.
Finally, the bill would authorize the CFTC to criminally prosecute those who violate the Commodity Exchange Act.