House Shoots for Fall

WASHINGTON — The House Financial Services Committee will vote on three municipal bond-related bills this fall and will also take up legislation to regulate municipal and other over-the-counter derivatives.

The timing of the legislation was discussed at a joint press conference yesterday by House Financial Services Committee chairman Barney Frank, D-Mass., and House Agriculture Committee chairman Collin Peterson, D-N.D., who, along with seven other Democrats,  unveiled an outline of the derivatives legislation.

“We’ve come up with a responsible approach that will bridge the differences between those members who want to completely eliminate the over-the-counter market and those who think that greater transparency is all that is needed,” Peterson said.

“Barney and I want to err on the side of too much regulation rather than too little, given what we’ve been through.”

Frank, who nodded in agreement with Peterson, said that the outline shows financial regulatory reform is moving forward.

He added that the two House committees expect to take up the derivatives measure soon after lawmakers return from their August recess. The full House could vote on the measure by the end of the year, he said.

The derivatives proposal would require OTC derivatives to be cleared by an approved clearinghouse and would encourage them to be exchange- or electronically traded unless they are nonstandardized contracts or no qualified clearing mechanism exists.

Derivatives also would be excepted from clearing if one party in the transaction does not qualify as a “major market participant” according to a regulator. All OTC derivatives would be subject to capital and margin requirements but those requirements would be higher for nonstandardized contracts.

The higher capital and margin requirements, which also have been proposed by the Obama administration, would be designed to both cover the increased risks that customized contracts pose and to deter dealers from customizing contracts to avoid central clearing and exchanges.

Derivatives counterparties would also be allowed to use non-cash collateral to satisfy margin requirements, which Frank said is aimed at encouraging people to use exchanges.

Some municipal market participants have expressed concerns that all but the largest governments would be able to post cash collateral, which typically is required on a daily basis by exchanges and clearinghouses.

In addition, the Securities and Exchange Commissions or the Commodities Futures Trading Commission, or potentially both, would oversee the regulation of OTC derivative dealers, exchanges and clearinghouses.

The deciding factor used to determine which agency will regulate a specific derivative would depend on the underlying asset on which it is based, according an outline of the proposal.

At the same time, a council of regulators would resolve disputes between the SEC and CFTC over joint regulation of existing derivative products as well as any new products.

A congressional source said that the Financial Services Committee has no immediate plans to ­impose specific suitability requirements on small governments seeking to engage in derivatives, as was called for in an early blueprint of financial regulatory reform released by the Obama administration.

Separately, Frank told reporters that his committee plans to move forward in October with legislation aimed to impose professional standards and other regulations on currently unregulated municipal financial and swap advisers.

The FA bill, which was introduced in May and seeks to place all muni advisers on a level regulatory playing field, would require FAs to register with the SEC and would impose a “fiduciary” standard on them.

The congressional source said that lawmakers feel the FA bill, coupled with regulations to impose a fiduciary standard on dealers serving as investment advisers, would adequately ensure that unsophisticated municipalities do not engage in derivatives contracts that they do not understand.

The source said that the FA bill would be considered along with legislation to authorize the Federal Reserve to establish a temporary liquidity facility for variable-rate demand obligations, as well as a third bill to authorize the Treasury Department to run a temporary reinsurance program that would cover all insured municipal credits.

A fourth muni bill, which would require rating agencies to rate municipal bonds more similarly to corporate debt, is likely to be added to legislation designed to increase federal oversight of rating agencies, the congressional source said.

A draft of that legislation was sent to lawmakers last week and seeks to mitigate conflicts on interest, increase the transparency of the rating process and reduce investor reliance on ratings.

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