(Updated with more details, background and a comment from the CFTC chairman's Tuesday speech.)
By Sarah N. Lynch and Fawn Johnson
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- House Financial Services Committee Chairman Barney Frank (D., Mass.) on Tuesday defended pending derivatives legislation, saying its proposed exemptions for companies that use swaps are limited.
Frank was responding to critics, including U.S. Commodity Futures Trading Commission Chairman Gary Gensler, who have said the proposed new regulations are too lax and should require all routine swaps to be cleared and traded on transparent platforms.
"The poster child for derivatives causing problems is American International Group," Frank said at a press conference. "The kind of trading that AIG did will be mandated to be on the exchanges."
The House Financial Services Committee and the House Agriculture Committee last month both approved similar bills aimed at shedding more light on the opaque over-the-counter market. The two bills would require dealer firms and major swap traders to process their swaps through clearinghouses, which guarantee trades, and execute transactions on trading venues.
But amid concerns by the business community about the costs of posting cash margin to a clearinghouse, lawmakers on both committees carved out clearing and trading exemptions for companies that use swaps to mitigate risks such as interest-rate fluctuations.
Frank has already tweaked his bill to address the CFTC's concerns that the new regulations might fail to capture big firms like Fannie Mae (FNM) and Freddie Mac (FRE), which could have a ripple-effect on the market if they fail. Despite that change, Gensler has stated publicly he still has lingering concerns that the two bills may not cover enough trades. At the very least, he said, hedge funds and non-bank financial firms should also be required to clear their swaps. Ideally, he'd also like to see commercial firms clear their swaps as well, and then be allowed to enter into individual credit arrangements with clearing members to address their worries about the cost of clearing.
"I believe we can build upon these historic efforts and bring more transactions into these trading venues," Gensler said Tuesday at a speech before the International Emissions Trading Association. "If Congress decides to exempt some transactions by corporate end users, I believe the exemption should be explicit and narrow."
Frank also told reporters he plans to change a provision in the bill giving clearinghouses the power to decide which swaps get cleared.
That provision was sought by Gensler, but Frank said he now thinks it may create a loophole because many of the largest financial firms own a stake in clearinghouses and may not want certain swaps cleared or listed on exchanges. Conversely, for-profit clearinghouses may also seek to bolster their volume and clear swaps at the expense of risk management.
Gensler "didn't want to be the one to have to decide" which swaps get cleared and listed on exchanges, Frank said, but "he can't pass off that responsibility."
"He's going to have work with us because there is this fear that if you leave clearinghouses in charge of a procedure they will be self protective," Frank added.
Frank said he has been working closely with House Agriculture Committee Chairman Collin Peterson (D, Minn.) to meld the two derivatives bills together before the full House votes on them.
"I think we're going to be able to come together on a common bill," Frank said.
Frank also said that the CFTC and the Securities and Exchange Commission will be the final arbiters of whether companies can be exempt from clearing and trading requirements.
- By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com
(Fawn Johnson contributed to this article.)