Some of the world’s largest companies would win a crucial trading exemption in the sweeping reforms of the vast over-the-counter derivatives markets under draft legislation before the US Congress.
The news marks a partial victory for companies such as oil and airline groups that in recent weeks have been arguing they would be unfairly penalised if derivatives market reforms went ahead as proposed by the US administration.
The draft bill, released on Friday by the House of Representatives’ financial services committee, is the first sign that key US lawmakers are taking a softer stance than the Obama administration in cleaning up the financial system.
Gregory Mocek, a partner in the energy and derivatives markets group at McDermott Will & Emery law firm, said: “This clearly reflects some of the more practical changes that the natural corporate hedgers have lobbied for since the Treasury proposal came out.”
The US Treasury has called for all “standardised” OTC derivatives, which have been blamed for exacerbating the crisis, to be processed through clearing houses to lower risk in the financial system.
Big manufacturers, transport and resources companies – which use derivatives to hedge interest rates, currency movements and commodity prices – have voiced concerns that the Treasury’s original reform plans would require them to put up large amounts of cash against outstanding swaps.
Companies using derivatives tend to place these trades directly with banks, which either give companies credit lines that can be used as collateral against derivatives contracts or use other assets.
A forced move towards centralised clearing could push companies to place cash or liquid assets such as US Treasury debt as collateral, creating a “liquidity drain” at a time when balance sheets are already stretched.
However, the draft bill proposed that a requirement for OTC swaps to be cleared would not apply if “one of the counterparties to the swap is not a swap dealer or major swaps participant”.
A spokeswoman for the committee, chaired by Massachusetts Democrat Barney Frank, said companies would be exempt as long as they did not maintain a “substantial net position”, defined by the Securities and Exchange Commission and Commodity Futures Trading Commission.
The draft also said the regulators, not clearing houses, would decide which swaps contracts would be cleared “consistent with the public interest”.
Melissa Bean, an Illinois Democrat on the committee, said: “This bill moves us in the right direction by reducing risk to the economy with robust and dynamic oversight of major market participants, while preserving appropriate risk-management tools for end users.”
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