House Moves on Financial Regulatory Reform

[Update 1 corrects Committee vote.]

The House Financial Services Committee, having wrapped up a series of hearings over the Obama Administration’s proposed financial regulatory reforms last week, is moving on several discussion drafts that would change the way the US financial sector operates.

The Committee, in a 43-26 vote Thursday, approved financial regulatory reform legislation that would require the comprehensive regulation of over-the-counter (OTC) derivatives like credit default swaps (CDS). The legislation sets a framework for the regulation of swap markets, dealers and major swap participants.

The legislation passed Thursday requires swap dealers and major swap participants to register with regulators and requires clearing organizations to provide transaction information to appropriate regulators. The bill also provides for public disclosure of aggregate data on swap trading volumes and positions in a way that protects the business transactions and market positions of individuals.

The legislation also establishes standards regarding what swap transactions are subject to submission to a clearinghouse.

Fitch Ratings indicated in August the clearing of single-name contracts and CDS indices through such a central counterparty is a a necessary step to reduce overall concentrated risk in the OTC market.

US Treasury Department secretary Timothy Geithner in mid-July testimony blamed a lack of transparency in the market for OTC derivatives — which in 2008 topped a gross market value of more than $20trn — that let companies like AIG over-extend themselves and sell more credit protection for residential mortgage-backed securities (RMBS) than they could cover.

Regulation of the OTC derivatives market was joined Thursday by consideration of another significant piece of financial regulatory reform.

On the same day, Rep. Brad Miller (D-N.C.) and Rep. Dennis Moore (D-Kan.) filed an amendment to the Consumer Financial Protection Agency (CFPA) bill, exempting banks with less than $10bn in assets and credit unions with less than $1.5bn in assets from examination by the new agency. The CFPA would act as examiner for 150 banks with more than $10bn in assets under the amendment and would regulate the types of loan products marketed and sold to consumers.

“Community banks and credit unions who were not the worst actors in bad lending practices have a valid argument that they could be overwhelmed by multiple federal agency examinations, virtually doubling their administrative burden,” Miller said in a statement. “Safeguards remain in place that would allow CFPA to take over enforcement if any bank, no matter what size, has repeat violations.”

A voice vote on the amendment was expected in the House as early as this week.

Write to Diana Golobay.