'Oversight Agenda' Approved

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WASHINGTON - The House Financial Services Committee yesterday approved an expansive "oversight agenda" for this year and next that includes examination of a number of municipal market-related issues and could lead to legislation in some cases.

The 24-page agenda calls for the committee to examine the need for regulation of independent financial advisers, improvements or other changes to muni disclosure requirements, and federal participation in the municipal bond or reinsurance marketplace. The committee also said it will monitor the fallout of the collapse of the auction-rate securities market.

A congressional source said yesterday that while muni market issues are a "high priority" for committee chairman Barney Frank, D-Mass., no firm date has yet been set for the committee to consider them.

Frank has said the first priority for his committee should be the establishment of a systemic risk regulator, followed by more specific issues, which could include muni market regulation and the establishment of a federal insurance program that would back municipal debt sold by state and local issuers.

The agenda the committee approved yesterday refers to the issue of a federally backed muni insurer, which it said may be needed to address the "unfavorable credit environment" for states and localities trying to access the capital markets.

"In this regard, the committee will explore the possibility of federal participation in the municipal bond or reinsurance marketplace," the committee said in the document.

The push for a federally backed insurer comes as freshman Rep. Gerald Connolly, D-Va., who has a close relationship with Frank, plans to soon form an advisory panel of municipal market participants. The panel would suggest ways the federal government can best help lure investors to the muni market, according to spokesman George Burke.

Connolly is not pushing a specific idea yet, though he seemed supportive of a plan to create a nonprofit mutual bond insurer at a Government Finance Officer's Association meeting here late last month.

In addition, the agenda indicates that the committee will continue to monitor the efforts of the Securities and Exchange Commission, the Financial Industry Regulatory Authority, state securities regulators, and other law enforcement agencies to reach settlements with financial institutions to buy back illiquid auction-rate securities.

More generally, the committee also will examine efforts to make the municipal bond market more efficient and improve issuers' access to capital, as well as "how different segments of the market are regulated, including the role of independent financial advisers, including those who [are] involved in derivative transactions, and disclosure requirements," according to the agenda. The Municipal Securities Rulemaking Board's EMMA system - which maintains disclosure documents and displays price and other real-time transaction information - will be another area of focus.

Separately, the House Agriculture Committee yesterday approved by voice vote a derivatives bill that would require most over-the-counter derivatives to be cleared through an exchange. The Derivatives Markets Transparency and Accountability Act, introduced by chairman Collin Peterson, D-Minn, on Wednesday, would give the Commodity Futures Trading Commission authority over derivatives and is similar to legislation introduced by Sen. Tom Harkin, D- Iowa.

The ultimate fate of derivatives bill is unclear, however, and it appears to have sparked a jurisdictional spat between Peterson and Frank. Frank has said he plans to seek a referral of the bill to his committee and also that he wants to wait until Congress considers a systemic regulator, which could be the Federal Reserve. Peterson's bill could undermine that effort.

The International Swaps and Derivatives Association spoke out against the Peterson bill in a statement yesterday, saying it "would make it harder for American companies to hedge risk and could potentially lead to less liquid, more volatile markets."

Market participants say the derivatives legislation may pose a threat to interest rate swaps, many of which are used by municipal issuers to hedge against interest rate risk associated with variable-rate debt. Specifically, they fear that the bill will eliminate interest rate derivatives in the muni market if swaps are forced onto an exchange and required to fit a standardized contract. Most muni-related interest rate derivatives are unique to the issuer and almost never trade.

"An exchange is designed to handle commoditized products" like oil, for example, said Scott G. Fairclough, head of the public finance derivatives group at Sterne, Agee & Leach Inc. in New York. "A swap is tailored to the needs of the issuer."

But the bill may provide some leeway for muni and other derivatives. An amendment sponsored by Rep. Leonard Boswell, D-Iowa, that was adopted by the committee would exclude some derivatives from having to be cleared on an exchange if information about them was provided to the CFTC. Exemptions would be granted for highly customized derivatives that are not traded, or are traded infrequently and do not have transparent prices.

"If the amendment is designed to exempt muni issuers from having to clear their swaps through an exchange, then, yes, it helps maintain the ability of clients' bankers to meet its needs for structuring the swap specifically to the idiosyncrasies of the issuer," Fairclough said.

The bill also would give the SEC authority over financial derivatives cleared through an SEC-regulated clearing authority.

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