Most off-exchange derivatives would be forced through central clearing houses and on to exchanges in a draft law that cleared a hurdle in Congress on Thursday, but many non-financial companies will be excluded from the rules.
End-users such as an airline hedging against higher fuel prices would be allowed to continue using over the counter (OTC) derivatives in the bill, that was approved by the House financial services committee. That satisfies companies that have lobbied in recent months to be allowed to escape a requirement that many more OTC derivatives be traded on-exchange and be processed through clearing houses. They fear this could cause a huge drain on cash as it would require the posting of margins.
However, some liberal Democrats are concerned that too many companies will be able to continue to use OTC derivatives.
The bill drew criticism from groups representing market participants that will be forced onto exchanges and clearing houses such as swaps dealers. “Requiring any derivative that is not exchange-traded to migrate to an exchange or to an electronic trading platform would not serve the needs of the hundreds of major US companies who use versatile risk management tools to better manage their business risks,” said Robert Pickel, chief executive of the International Swaps and Derivatives Association.
Ken Bentsen, vice-president of the Securities Industry and Financial Markets Association, said: “Mandating particular transaction modes, as this bill does, could raise transaction costs while not necessarily reducing risk in a commensurate amount.”
The bill, the first based on the Obama administration’s regulatory overhaul, will have to be brought together with a parallel bill being drafted in the House agriculture committee before it is combined with legislation drawn up in the Senate. But the version passed on Thursday by the committee chaired by Barney Frank, the Democratic representative from Massachusetts, is likely to be close to the final product.
Get alerts on FT Trading Room when a new story is published