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By Laura Mandaro & Ronald D. Orol, MarketWatch
"Proposed legislation to regulate credit default swaps to limit purchases of protection only to those with exposure to economic loss in the instrument being insured could have the unintended (or intended) consequence of collapsing this market," Banc of America Securities credit strategist Jeffrey Rosenberg wrote in a report.
Starting Tuesday afternoon, the House Committee on Agriculture, led by Chairman Collin Peterson, D-Minn., plans two days of hearings in Washington, D.C. to discuss legislation that would impose severe curbs on credit derivatives. Representatives of trade groups representing farmers and gasoline-station operators and the major futures exchanges are scheduled to testify.
Peterson's bill would make it a violation of the Commodity Exchange Act to enter into a type of credit derivative known as a "naked" credit default swap. In other words, the only buyers of those securities, which act as protection against the risk that an underlying corporate or sovereign borrower will default on its debt, would be those investors who must have "direct exposure to financial loss" on the underlying entity.
[..]
Peterson's new bill also would impose limits on the speculative positions traders in commodities can enter into, taking up some of the same curbs proposed by Washington last year when oil and grains prices hit record highs. Legislation aimed at financial trades of derivatives died after commodities prices nosedived in the second half of the year.
Even if final legislation avoids killing the credit-default swaps market, Rosenberg said, the market's still due for a stronger regulatory regime.
Analysts are anticipating regulators will institute a central clearing house for credit default swaps, similar to the clearing organizations in place for commodities futures.
Senate securities subcommittee chairman Jack Reed, D-R.I. said in an interview that the clearing house would require equity investments from participants, though policymakers were still working out details on how much support such a clearinghouse would demand.
Unlike the ban on naked CDS, a clearinghouse isn't raising the same hackles among industry participants.
"The sooner a central clearing counterparty can emerge, the sooner CDS can reform its image," Brian Yelvington, senior macro strategist at CreditSights, wrote in a report Monday.
*****
Draft language of the Derivatives Markets Transparency and Accountability Act
Outline of the draft language
schedule of the House Committee on Agriculture
Tues., February 3rd – 1:00 p.m.
1300 Longworth House Office Building
Full Committee on Agriculture—Public Hearing.
RE: To review derivatives legislation.
NOTE: Due to room renovations, seating for the public and press will be extremely limited. The hearing will be webcast live on the House Agriculture Committee website here.
Panel I
Mr. Tom Buis, President, National Farmers Union, Washington, D.C.
Mr. John Damgard, President, Futures Industry Association, Washington, D.C.
Mr. Michael Greenberger, Law School Professor, University of Maryland School of Law, Baltimore, Maryland
Mr. Michael A. Gooch, Chairman and Chief Executive Officer, GFI Group Inc., New York, New York
Mr. Sean Cota, President, Cota & Cota Inc., on behalf of Petroleum Marketers Association of America and New England Fuel Institute, Bellow Falls, Vermont
Mr. Terrance A. Duffy, Executive Chairman, CME Group Inc., Chicago, Illinois
Panel II
Mr. Daniel J. Roth, President and Chief Executive Officer, National Futures Association, Chicago, Illinois
Mr. Tyson Slocum, Director, Public Citizen's Energy Program, Washington, D.C.
Wed., February 4th – 10:30 a.m.
1300 Longworth House Office Building
Full Committee on Agriculture—Public Hearing.
RE: To review derivatives legislation.
Witness lists for hearings, if applicable, will be released to the public 24 hours before the hearing takes place. If you wish to listen to or watch any hearing, please take note of the hearing location and follow the link below to the Live Audio/Video Page.
"Proposed legislation to regulate credit default swaps to limit purchases of protection only to those with exposure to economic loss in the instrument being insured could have the unintended (or intended) consequence of collapsing this market," Banc of America Securities credit strategist Jeffrey Rosenberg wrote in a report.
Starting Tuesday afternoon, the House Committee on Agriculture, led by Chairman Collin Peterson, D-Minn., plans two days of hearings in Washington, D.C. to discuss legislation that would impose severe curbs on credit derivatives. Representatives of trade groups representing farmers and gasoline-station operators and the major futures exchanges are scheduled to testify.
Peterson's bill would make it a violation of the Commodity Exchange Act to enter into a type of credit derivative known as a "naked" credit default swap. In other words, the only buyers of those securities, which act as protection against the risk that an underlying corporate or sovereign borrower will default on its debt, would be those investors who must have "direct exposure to financial loss" on the underlying entity.
[..]
Peterson's new bill also would impose limits on the speculative positions traders in commodities can enter into, taking up some of the same curbs proposed by Washington last year when oil and grains prices hit record highs. Legislation aimed at financial trades of derivatives died after commodities prices nosedived in the second half of the year.
Even if final legislation avoids killing the credit-default swaps market, Rosenberg said, the market's still due for a stronger regulatory regime.
Analysts are anticipating regulators will institute a central clearing house for credit default swaps, similar to the clearing organizations in place for commodities futures.
Senate securities subcommittee chairman Jack Reed, D-R.I. said in an interview that the clearing house would require equity investments from participants, though policymakers were still working out details on how much support such a clearinghouse would demand.
Unlike the ban on naked CDS, a clearinghouse isn't raising the same hackles among industry participants.
"The sooner a central clearing counterparty can emerge, the sooner CDS can reform its image," Brian Yelvington, senior macro strategist at CreditSights, wrote in a report Monday.
*****
Draft language of the Derivatives Markets Transparency and Accountability Act
Outline of the draft language
schedule of the House Committee on Agriculture
Tues., February 3rd – 1:00 p.m.
1300 Longworth House Office Building
Full Committee on Agriculture—Public Hearing.
RE: To review derivatives legislation.
NOTE: Due to room renovations, seating for the public and press will be extremely limited. The hearing will be webcast live on the House Agriculture Committee website here.
Panel I
Mr. Tom Buis, President, National Farmers Union, Washington, D.C.
Mr. John Damgard, President, Futures Industry Association, Washington, D.C.
Mr. Michael Greenberger, Law School Professor, University of Maryland School of Law, Baltimore, Maryland
Mr. Michael A. Gooch, Chairman and Chief Executive Officer, GFI Group Inc., New York, New York
Mr. Sean Cota, President, Cota & Cota Inc., on behalf of Petroleum Marketers Association of America and New England Fuel Institute, Bellow Falls, Vermont
Mr. Terrance A. Duffy, Executive Chairman, CME Group Inc., Chicago, Illinois
Panel II
Mr. Daniel J. Roth, President and Chief Executive Officer, National Futures Association, Chicago, Illinois
Mr. Tyson Slocum, Director, Public Citizen's Energy Program, Washington, D.C.
Wed., February 4th – 10:30 a.m.
1300 Longworth House Office Building
Full Committee on Agriculture—Public Hearing.
RE: To review derivatives legislation.
Witness lists for hearings, if applicable, will be released to the public 24 hours before the hearing takes place. If you wish to listen to or watch any hearing, please take note of the hearing location and follow the link below to the Live Audio/Video Page.
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