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Derivatives Bill Advances

October 15, 2009 - by Donny Shaw

News from today’s House Financial Services derivatives regulation mark-up, via MarketWatch:

The House Financial Services Committee chose not to ban transactions in the complex financial instruments. However, committee members voted 43-26 to require derivatives traders and dealers to keep greater capital on hand. They also imposed new transparency, recordkeeping and reporting regulations on traders of the previously opaque derivatives transactions.

“There is a lesson of the last year, which has been that the systemic impact of not having most of this be put on exchanges, is too great,” said Chairman Barney Frank, D-Mass., a key author of the legislation.

A number of key amendments were included in the base bill, including a major provision introduced by Frank that would require a derivatives transaction cleared through a clearinghouse to be traded on a transparent exchange if it is between financial institutions.

The provision includes exemption for certain end-user traders such as small business owners who trade derivatives to manage commercial risk to their production facilities. Small business end users are usually employers that use derivatives to hedge fluctuations in interest rates, alterations in foreign currency or hikes in oil prices.

The committee members also approved a variety of other key provisions, including one that would prohibit private financial institution broker-dealers engaging in major derivatives deals from owning clearinghouse facilities.

You can read a PDF file of the legislation here if you’re into that kind of thing.

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