House Panel Clears Derivatives Bill, Debates Plan for Consumer Agency

By Zachary A. Goldfarb
Washington Post Staff Writer
Friday, October 16, 2009

The Obama administration won its first major victory Thursday in its effort to overhaul the nation's financial system as a key House committee passed a bill to regulate exotic financial instruments known as derivatives.

Trading in derivatives -- contracts used to bet on the movement of stocks, bonds, commodities and other things -- magnified last year's financial crisis by forcing companies to record bigger losses as markets collapsed. But for years policymakers had rejected regulating the derivatives market, worried about stifling financial innovation.

The vote Thursday by the House Financial Services Committee, largely along party lines, endorsed a central plank of the administration's plan for new regulations aimed at preventing another financial calamity. But the measure still faces a long road. The House Agriculture Committee, which also has oversight of derivatives, will vote on and quite possibly amend the proposal, and the full House and Senate must act, too.

The regulators that would be in charge of policing the derivatives market -- the Securities and Exchange Commission and the Commodity Futures Trading Commission -- hailed the passage of the legislation even as agency officials continued to voice concerns about whether it goes far enough.

"Substantive challenges remain," CFTC Chairman Gary Gensler said in a statement, adding that he intends to work with Congress to design a bill that "covers the entire marketplace without exception" and "to ensure that regulators have appropriate authorities to protect the public."

Meanwhile, the financial industry is angling to defeat a key proposal in the legislation that would require most derivatives to be traded on public exchanges, just as stocks and bonds are today.

Arousing more ideological disagreement among Financial Services Committee members Thursday was the next piece of legislation in the Obama administration's proposed regulatory overhaul: the creation of a federal agency to protect consumers of credit cards, mortgages and other financial products.

The agency, if established, would both issue new rules for consumer lending and send inspectors to banks and credit unions to ensure compliance.

The committee decided Thursday to limit the powers of the new agency over small banks with assets less than $10 billion and credit unions with less than $1.5 billion. The agency will write consumer protection rules for all financial firms, but small banks will remain under the exclusive supervision of existing banking regulators.

Community banks have tremendous political influence on Capitol Hill, and the change is an attempt to dampen their fervent opposition to the new agency. Proponents of the change, including Rep. Brad Miller (D-N.C.), justified the move by arguing that small banks have caused fewer problems and therefore need less federal oversight.

"Enacting legislation is an inherently messy process. This reduces the amount of opposition from the community banks and the credit unions, and that makes enacting the agency a bit easier," said Jaret Seiberg, a policy analyst at Washington Research Group.

The idea garnered little support among Republicans, who oppose the agency. Rep. Tom Price (R-Ga.) suggested renaming the bill the "Restricting the American Dream and Jobs Destruction Act," saying that the proposed legislation would lead to "a much more intrusive government."

The committee must also wrestle with whether the consumer agency's rules will trump state laws protecting consumers. The banking industry wants a uniform national standard, while states want the right to enact tougher rules than the federal government.

The committee reconvenes Tuesday to continue its deliberations on the consumer agency.

The derivatives legislation comes after the market mushroomed into the world's largest over the past decade, estimated to be in the hundreds of trillions of dollars. It has allowed traders around the world to influence and bet on a vast array of sectors, from how much companies pay to borrow money to the value of currencies and critical goods such as oil and cotton.

The bill would require banks and firms trading in derivatives to meet robust capital and reporting requirements. It would also require that most of the instruments be traded through clearinghouses, which would collect data about the market and order buyers and sellers to allocate enough money to cover any trades.

But regulators are concerned that the bill would not give them enough power to oversee the clearinghouses and exchanges that would be central to a newly regulated derivatives market. And regulators worry whether some companies that use derivatives, not for speculation but for hedging against risks, will be subject to lesser requirements. They plan to continue to advocate for increased powers as the bill makes its way through the legislative process.

Staff writer Binyamin Appelbaum contributed to this report.

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