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WASHINGTON — Two influential House lawmakers on Thursday announced an agreement on guidelines for legislation to impose broad new oversight on the financial instruments blamed for hastening the global economic crisis.
They said the House could vote in September on a bill to regulate derivatives, legislation that is a crucial element of Congress' effort to overhaul the system of financial rules.
The outline agreed to by Democratic Reps. Barney Frank, chairman of the House Financial Services Committee, and Collin Peterson, who heads the House Agriculture Committee, closely resembles the Obama administration's proposed plan for regulating derivatives.
Both proposals involve a new network of clearinghouses to provide transparency for trades in credit default swaps and other derivatives.
There would be incentives for derivatives to be traded on regulated futures exchanges, by imposing stringent capital requirements on dealers in so-called over-the-counter derivatives.
Left unresolved, however, is the question of whether so-called "naked" credit default swaps — where investors don't own the underlying bonds — would be banned. Financial industry interests say that would effectively gut the market for credit default swaps and hamper efforts to restore the battered credit markets in the wake of the crisis.
"We welcome the evolution of views" provided by the House legislative guidelines, Robert Pickel, executive director and CEO of the International Swaps and Derivatives Association, said in a statement Thursday. "Our principal concern with this or any other proposal is that any changes enacted ensure the availability and affordability of these important risk-management tools."
The trade group represents hundreds of banks and other companies from around the world that participate in the over-the-counter derivatives market — including Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Agricultural Bank of China, Abu Dhabi Commercial Bank and State Bank of India.
"We still believe there is a legitimate role" for customized derivatives contracts, said Scott DeFife, senior managing director of the Securities Industry and Financial Markets Association. Customized, as opposed to standard, derivatives are designed for specific users in a transaction and wouldn't be traded on exchanges under the new regulatory regime.
Derivatives are traded around the globe in a $600 trillion market that is largely unbridled. Credit default swaps, a form of insurance against loan defaults, account for about $60 trillion. The collapse of the swaps brought the downfall of Wall Street banking house Lehman Brothers Holdings Inc. and nearly toppled American International Group Inc. last fall, prompting the government to support the insurance conglomerate with about $180 billion.
The value of over-the-counter derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.
The goal of the new legislative outline "is to improve the regulation of derivatives so that they continue to perform their important market function but are less likely to contribute to a kind of irresponsibility that can cause a crisis," Frank said at a news conference. "Nobody here wants to ban them or even severely diminish them as an economic instrument."
The two House committees have tangled over turf in the past, and the leaders have yet to resolve the issue of how regulatory authority over derivatives would be split between two federal agencies, the Securities and Exchange Commission and the Commodity Futures Trading Commission. Still, the agreement is a significant development that pushes forward Congress' initiative to revamp the financial regulatory system.
"We want to err on the side of too much regulation rather than too little," Peterson said.
Some Republican lawmakers have warned against overreaching in regulating derivatives, saying that could hurt U.S. firms' competitiveness. Their party is in the minority in both the House and Senate.
