Finance, Agriculture Provide Proposals To Restructure Over-The-Counter Derivatives Market Regulation

Author:Ms Brenda Hanzl and Kari S. Larson
Profession:McDermott Will & Emery
 
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The three current drafts have certain similarities, but key differences could have a large impact on utilities and other energy providers that use hedges as a part of their business to mitigate exposure to price volatility.

The Obama administration has stated that derivative regulatory reform is a priority. The administration first proposed the idea of broad-based regulatory reform in a white paper on June 17, 2009. There now are multiple public proposals for enacting legislation for the Over-the-Counter-Derivatives Market Act of 2009. After the white paper, the chairman of the House Financial Services Committee, Representative Barney Frank (D-MA), and the chairman of the House Agriculture Committee, Colin Petersen (D-MN), proposed language on July 30, 2009. On August 11, 2009, the U.S. Department of the Treasury delivered legislative language to Congress (the Treasury Draft). On October 2, 2009, Rep. Frank released an updated discussion draft of proposed legislation (the Frank Draft). On October 9, 2009, the Agricultural Committee came out with a third draft of proposed legislation (the Agriculture Draft). Whatever legislation is finally decided upon will significantly restructure the regulatory framework that governs the market for over-the-counter (OTC) derivatives. While all three current drafts have certain similarities, key differences could have a large impact on utilities and other energy providers that use hedges as a part of their business to mitigate exposure to price volatility.

One main difference in the drafts is who decides what swaps will be regulated and how that determination is made. The Treasury Draft focuses on designating certain swaps as "standard" based on a series of criteria, and then applying rules based on a swap's classification as standard or non-standard, with Derivatives Clearing Organizations (DCOs), the U.S. Commodity Futures Trade Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC) determining which swaps will require clearance. The Frank Draft moves away from a concept of standardization and gives the CFTC and SEC full joint authority to determine which swaps within their respective jurisdictions should require clearance and which should not. The Agriculture Draft, however, returns more to a standardized view of swaps, and puts the authority in the hands of the DCOs.

The criteria used in making this determination are significantly different among the proposals as well. Whereas the Treasury criteria...

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