A proposal by US lawmakers to limit the ownership that over-the-counter derivatives dealers may have in clearing houses was taken from a key piece of legislation amid concern from exchanges and clearers it may be anti-competitive.
The development highlights the tense relations between Washington lawmakers and the exchange and clearing industry as they push through sweeping regulatory reforms after the financial crisis.
In a bill passed last week by the House of Representatives’ financial services committee to reform the over-the-counter derivatives markets, an amendment was inserted at the last minute by Massachusetts congressman Stephen Lynch that appeared to limit the stake banks could collectively own in a clearing house to 20 per cent.
It appeared aimed at preventing clearing houses being dominated by the banks that are active in the OTC derivatives markets.
LCH.Clearnet, the London-based clearer and the Options Clearing Corporation, which clears trades for all US options exchanges, said they opposed the move.
Susan Milligan, special counsel at the OCC, said it was “purely anti-competitive” and would have favoured for-profit clearers compared with quasi-utility clearers like the OCC.
Steve Adamske, spokesman for the financial services committee, said on Thursday the 20 per cent limit had intended to limit dealer control of clearing houses but legal experts had decided it was invalid as it conflicted with another amendment.
The bill would, however, limit to 20 per cent the voting rights of dealers for “designated contract markets, exchanges and alternative swap execution facilities” – and not for clearing houses.
Mr Adamske said: “We will work with Mr Lynch’s office to determine the proper course of action.”
The confusion over the amendment caused alarm because the amendment’s emergence so late in the House legislative process shows how tough regulatory reforms in Washington are successfully being influenced by lobbying from certain parts of the exchanges and clearing business.
Under the legislation, LCH.Clearnet would probably be unable to operate in the US because its shareholder base is overwhelmingly the biggest dealers active in the OTC interest rate swaps market.