Prior to passage of a market oversight bill by the House Agriculture Committee last week, committee counsel Andy Baker outlined the changes between it and an earlier version, HR 977, passed in February.
Like 977, said Baker, “the substitute provides for position limits on physical commodities; clearing of over-the-counter (OTC) transactions; increased transparency, recording and record-keeping of offshore trading.
“The substitute also addresses jurisdictional issues in the context of swaps by providing for Commodities Futures Trading Commission (CFTC) jurisdiction over swaps and Securities and Exchange Commission (SEC) jurisdiction over swaps that are primarily based on securities. These two agencies are required to consult with each other and with banking regulators before regulating.
“The substitute requires a swap to be cleared if a clearing agency/organization will accept the swap for clearing and the CFTC/SEC has determined that clearing is mandatory. Clearing is not required if one of the counterparties isn’t a swap dealer or a major swap participant and can demonstrate appropriate business or risk-management practices for non-cleared swaps.
“Swaps that must be cleared must also be traded on exchange or on an alternative swap execution facility (ASEF) unless there is no exchange or ASEF that will list the swap. An ASEF is a facility for execution or trading of swaps such as an electronic trade execution facility.
“Voice brokers are still permitted to enter and execute swaps subject to the clearing requirements so long as they process the swap through a regulated exchange or ASEF.
“Uncleared swaps must be reported to a swap repository or through the regulatory.
“The substitute (amendment) requires swap dealers and major swap participants to maintain capital appropriate to the risk associated with non-cleared swaps being held as a dealer or major participant. Dealers and major participants must also meet initial and variation margin requirements to help their own safety and soundness and which are appropriate for the risk associated with the non-cleared swaps they hold as a dealer or major participant.
“Dealers must also meet set-aside requirements for funds or property associated with an uncleared swap.
“The substitute (amendment) requires the CFTC to establish position limits on swaps that perform a significant price discovery function and require aggregate limits across markets. It further requires CFTC to establish position limits on futures transactions for physically deliverable commodities that are applicable to spot-month/each month and all months aggregated — and to hold hearings on such position limits.
“The CFTC is also authorized to provide exemptions to position limits. The substitute (amendment) foreign boards of trade to meet certain standards of comparability to the requirements applicable to U.S. boards of trade and provides legal certainty for certain contracts traded on, or through, a foreign board of trade.”