WASHINGTON - Banks could gain a new federal regulator under a bill scheduled to be taken up by Congress this week.
The Commodity Futures Modernization Act of 2000, which was approved by the House Agriculture Committee June 27, will be voted on in the House Banking Committee on Thursday and in the House Commerce Committee as early as this week.
The bill could open the door to regulation of banks' swap transactions by the Commodity Futures Trading Commission, according to industry lobbyists.
The bill's primary purpose is to reauthorize the Commodity Exchange Act, which expires Sept. 30; but it also attempts to address an issue that has troubled bankers for years: the uncertain legal status of swaps.
Because swaps have many of the same characteristics as futures contracts - both are agreements to sell or exchange something at a future date - the CFTC has periodically floated the possibility that swaps are simply a variety of futures contracts. Because the Commodities Exchange Act gives the CFTC authority over all futures contracts, that would place swaps under CFTC regulation.
However, if the CFTC claimed regulatory jurisdiction, swaps transactions - with trillions of dollars of notional value - would become illegal and unenforceable. That's because the Commodities Exchange Act says that in order to be enforceable, all futures must be traded on exchanges. Swaps cannot be traded on exchanges because they are not uniform products, but highly-individualized transactions designed to suit particular needs.
Therefore, if swaps are futures, they are illegal because they are not traded on exchanges.
Under the legislation pending in the House, the majority of swaps contracts written by banks today would not be futures and would not be regulated by the CFTC. The contracts would get the so-called "legal certainty" the industry has been clamoring for.
But some industry representatives want more.
Mark C. Brickell, a managing director with J.P. Morgan Securities Inc., characterized the bill as a short-term fix. Specifically, he said, the bill fails to protect certain swap transactions from CFTC regulation, such as those executed over an electronic system, and those involving either individuals or small businesses.
Under the law, banks would have to request an exemption from the CFTC in order to trade such products. Because Mr. Brickell and others said that such transactions could grow into profitable lines of business for banks, they are strenuously opposing any move that would give the CFTC, and by extension House Agriculture, the power to regulate them.
In congressional testimony Mr. Brickell said, "It is hard to believe that the House Banking Committee will hand over to the House Agriculture Committee the authority to supervise regulation of swaps done by banks with their small business and depositor customers. It's not good for banks or their customers."
Other industry representatives are willing to take what they can get.
"ISDA's position is that the bill gets to where we need to be in terms of providing legal certainty," said Stacey Carey, a lobbyist for the International Swaps and Derivatives Association.
The legislation is supported by several large banks and securities firms, including Citigroup Inc., Chase Manhattan Corp., and Merrill Lynch & Co., which have formed an ad hoc coalition to lobby for the bill.
The firms are reluctant to endorse changes to the legislation such as those proposed by Rep. Jim Leach, R-Iowa, for fear that by overreaching they will lose the support.
"The coalition supports the bill that came out of the Agriculture Committee," said Joseph L. Seidel, a partner at Williams & Jensen, the law firm representing the coalition. "But anything can be improved."
Coming under CFTC oversight would raise banks' costs, making it tougher to compete against unregulated providers. It would also inject new uncertainty to a business that has been booming at banks. Swaps are an increasingly important derivatives product offered by banks. The value of swaps contracts held by commercial banks eclipsed the industry's futures and forwards business in late 1997, and by March 31, had more than doubled to $19.7 trillion.
The banking industry's best chance for favorable amendments to the bill will come Thursday, when House Banking takes up the measure.
"The fact is that banks totally dominate the swaps market, and that needs to be taken into account in writing this law," said a committee spokesman.
In a meeting with industry lobbyists Friday, Committee Chairman Leach hinted at some of the amendments he is considering.
One possibility is inserting a definition of a futures contract into the Commodities Exchange Act. The definition would find that futures contracts are limited to agricultural derivatives and any other derivative that the CFTC is specifically asked to regulate as a futures contract.
Another possibility, Rep. Leach told the lobbyists, is a broader set of exclusions and exemptions based on the swaps language in the Gramm-Leach-Bliley Act. That language excludes swaps written by banks from the reach of the Securities and Exchange Commission; Rep. Leach is considering language that would shield the same transactions from the CFTC.
The Senate Agriculture Committee approved legislation June 29 that mirrors the House Agriculture Committee's bill. But most observers expect the Senate to stand back and see if the bill can get through the House.