WASHINGTON — Several House Democrats rejected arguments Thursday that forcing derivatives trades onto clearing platforms or exchanges could cost counterparties millions.
At the first of two hearings by the House Agriculture Committee to review a bill proposed by the Treasury Department to regulate derivatives, members heard from business and trade groups that said their customers used derivatives to hedge risks such as fluctuating grain and gas prices. Meeting margin requirements set by a central clearing party could make it too difficult for these businesses to continue using derivatives to hedge, they said, and expose them to greater risks.
But Democratic committee members dismissed many of those claims. Rep. Collin Peterson, D-Minn., the panel's chairman, warned at the outset that he suspected many large derivatives traders and dealers — including big banks — would try to lobby the committee to relax the proposed regulations so as not to lose the large profit margins they now earn.
"I am somewhat concerned that the big players in this are sending people over here to talk to members to try to get exemptions for themselves again, and there's some of that going on," Peterson told a panel of witnesses who were arguing that the end users they represent should be exempt from having to clear their derivatives contracts or trade them on an exchange.
He told the witnesses that he is "not really here to put you guys in a tougher position … ; you're not the problem. But in the process I don't want to leave a loophole that's going to get us back into this position again. As far as I'm concerned, we're not going back to the system we had before."
Another Democrat, Rep. Jim Marshall of Georgia, was quick to pounce when a witness, Richard Hirst, the general counsel for Delta Air Lines, said that his company already must put up collateral when engaging in derivatives contracts to hedge against fuel prices.
"Doesn't sound to me like there's that much change if you're already putting up collateral anyway," Marshall said, cutting off Hirst in mid-sentence.
Later Peterson seemed pleased when witness Garry O'Connor, the chief product officer for the International Derivatives Clearing Group LLC, said in his opening statement that requiring central clearing is not too outrageous an idea.
"You're saying it's not as hard to do or as complicated as some people make out?" Peterson asked O'Connor.
"There is a cost to central clearing," O'Connor replied, "but there is also a great benefit to it, and I think it's difficult to sit in this room and say, 'I would like to see more transparency in the market, I would like to see increased liquidity in the market, and I would like to be protected from systemic risk, but I don't want to pay anything for it.' It's just a question of the cost and the benefits."
Responding to another question from Peterson, O'Connor said companies wanting to engage in derivatives trades to hedge but unable to put up cash for a clearing platform's margin requirements could still find a way to centrally clear their trades.
"There is flexibility there," he said.
The Agriculture Committee is to hold a second hearing to examine the Treasury's proposal on Tuesday. So far, the plan appears to be one of the few parts of regulatory reform that has momentum. Key leaders in the House and Senate appear to be backing the vast majority of the Treasury's proposals.
