Last week, the House Agriculture Committee approved legislation to increase the transparency and strengthen oversight of futures, options and over-the-counter (OTC) markets. By voice vote, the Committee approved the Derivatives Markets Transparency and Accountability Act of 2009 as amended, a bill sponsored by Committee Chairman Collin C. Peterson of Minnesota.
The legislation, H.R. 977, is designed to bring greater transparency and oversight to futures and OTC derivatives markets. It toughens position limits on futures contracts for physically-deliverable commodities as a way to prevent potential price distortions caused by excessive speculative trading. The bill also imposes a clearing requirement on OTC derivatives contracts and empowers the Commodity Futures Trading Commission (CFTC) with the ability to suspend trading in naked credit default swaps under certain circumstances.
“This bill broadens and improves on last year’s bipartisan derivatives legislation that passed the House by a wide margin,” Chairman Peterson says. “The urgency to fix the problems in regulated and unregulated futures markets magnified by the credit crisis and the collapse of some of America’s largest financial institutions: entities that were heavily involved in the trading of off-exchange credit derivatives like swaps contracts. Their failures have put the American taxpayer on the hook, so just sitting back and doing nothing is not an option. Congress should act quickly and pass a bill that will bring much-needed transparency to derivatives markets.”
H.R. 977 contains provisions similar to a bipartisan bill to strengthen the oversight of futures markets from the 110th Congress. That bill, introduced by Chairman Peterson, passed the House last September by a vote of 283-133. In addition, the Committee held three hearings on credit derivatives late last year, along with two hearings last week with industry and stakeholder groups to examine derivatives legislation.
Provisions included in the Derivatives Markets Transparency and Accountability Act would:
- Require all prospective over-the-counter transactions to be settled and cleared through a CFTC-regulated designated clearing organization, unless exempted by the CFTC in accordance with specified criteria. In some cases, the clearing requirement can be met through a Securities and Exchange Commission (SEC) regulated clearing agency or a properly regulated foreign clearinghouse.
- Give CFTC the authority, with the President’s consent, to suspend naked credit default swap trading whenever a SEC short selling suspension order is in effect.
- Close the so-called “London Loophole” by requiring foreign boards of trade to share trading data and adopt speculative position limits on contracts that trade U.S. commodities similar to U.S.-regulated exchanges.
- Require CFTC to set trading limits for physically-deliverable commodities, in order to prevent excessive speculation.
- Empower the CFTC to criminally prosecute people who violate commodities legislation.
- Limit eligibility for hedge exemptions to bona-fide hedgers.
- Improve transparency by requiring that CFTC disaggregate and separately report the trading activity of index funds and swap dealers in agriculture and energy markets.
- Call for new, full-time CFTC employees to enforce manipulation and prevent fraud.
- Authorize CFTC to take corrective action if it finds disruption in over-the-counter markets for energy and gas.