The House Financial Services Committee is expected to begin voting today on derivatives and other regulatory reform legislation. The Regional Bond Dealers Association is urging committee chairman Barney Frank, D-Mass., to ensure the derivatives bill will allow state and local governments to enter into over-the-counter derivatives contracts, regardless of their size or sophistication.
“We believe that all municipalities should be free to enter into derivatives contracts with any regulated counterparty, regardless of the size of the municipality’s discretionary investments,” RBDA co-chief executive officers Michael Decker and Mike Nicholas wrote in a
The letter comes as Securities Exchange Commission chairman Mary Schapiro and other SEC officials have been pushing the committee to toughen its bill to restrict small, unsophisticated municipalities from participating in the over-the-counter derivatives market.
But thus far, neither the Frank bill, a bill introduced by House Agriculture Committee chairman Collin Peterson, D-Minn., or the administration’s derivatives legislative proposal, which the Frank and Peterson bills essentially mimic on this issue, would do that.
Only a bill introduced Sept. 22 by Sen. Jack Reed, D-R.I., chairman of the Senate Banking Committee’s securities subcommittee, would prohibit state and local governments with $50 million or less of discretionary investments from participating in over-the-counter derivatives transactions.
The bill would not allow a government to count its bond proceeds in determining whether it meets or exceeds the $50 million threshold. In Reed’s bill, governments unable to meet the threshold could only participate in derivatives transactions done over exchanges.
The Frank and Peterson bills do little to change the current language in the Commodity Exchange Act. Under the act, a government is an “eligible contract participant” for a derivative transaction if it meets one of two requirements: it has discretionary investments of $25 million, or its counterparty is a bank or broker-dealer or other regulated entity.
The Frank and Peterson bills essentially keep the CEA language but change the $25 million figure to $50 million so state and local governments are permitted to freely enter into over-the-counter derivatives contracts with regulated parties, regardless of their level of discretionary investments.
In their letter to Frank, Decker and Nicholas note that his bill, for the first time, would regulate swap dealers and subsidiaries of large banks and broker-dealers that currently are not regulated. They urge Frank to amend the underlying CEA language to include swap dealers and subsidiaries on its list of regulated entities.
“The change we propose would allow small municipalities to choose the regulated counterparty that offers the best pricing and lowest counterparty risk,” they told Frank.
