NU Online News Service, Oct. 15, 1:39 p.m.EDT

WASHINGTON–In legislation spurred by the near-collapseof American International Group, the House Financial ServicesCommittee approved a bill today to significantly increase federalregulation of the credit default swaps trading.

The Over-the-Counter Derivatives Market Act of 2009 was reportedout of the Committee by a 43-26 vote. Only one Republican, Rep.Walter Jones, R-N.C., joined all committee Democrats in passing themeasure.

It now goes to the House Agriculture Committee, which hasoversight over the Commodities Futures Trading Commission.

That panel has drafted a similar, but not companion bill. Thebill will not go to the House floor before both panels agree on asingle piece of legislation. It will act on its bill nextWednesday.

Rep. Barney Frank, D-Mass., chairman of the FSC panel, said hehopes the bill can be signed by the end of the year.

Under legislation strengthened through amendment Wednesday, thebill mandates that trades between major financial players — such asbanks, hedge funds and AIG's Financial Products Group — must beplaced on exchanges.

AIG trading in derivatives led to billions in losses requiringthe government to step in and rescue the firm by taking a 79.9percent stock interest in the conglomerate.

Under the bill, trades by end-users such as airlines,manufacturers and farmers, which use them to hedge against businessrisk, would be exempt. These would include life insurancecompanies, who use these to reduce their interest rate and capitalloss risk on long-term securities used to fund insurance policies,annuities and other products.

A major backdrop to Tuesday and Wednesday's debates by lawmakersand during a hearing on the issue last week was the collapse ofAIG. Its inability to meet margin requirements forced the TreasuryDepartment and the Federal Reserve Board to loan the company $85billion last September in exchange for taxpayers taking astake.

Former AIG Chief Executive Officer Edward Liddy testifiedearlier this year that the firm's problems were caused by tradingby its London-based Financial Products unit in up to $2.77 trillionin unhedged credit default swaps.

In announcing plans to strengthen his bill by forcing most overthe counter derivative activity by financial firms onto exchanges,Rep. Frank said that it would continue to provide commercialbusinesses flexibility in using the OTC market while diminishingthe kind of speculative trades that led to AIG's downfall.

"It is in everybody's interest for as many of these as possibleto be
traded on exchanges," Rep. Frank said. "To the extent that youincrease trading
on exchanges, market forces are involved."

Last week, Gary Gensler, chairman of the U.S. CommoditiesFutures Trading Commission, testified that AIG's problems createdby swaps trading highlight the reason those markets must be broughtunder federal regulatory control.

He called AIG "Exhibit A" of the failures of the financialsystem and the financial regulatory system last fall.

"AIG highlights the need for each of these four priorities. AIGwas not required to meet capital standards or post margin forindividual transactions," he said.

Moreover, "It was not subject to business conduct standards forits back office functions," he said. "AIG's failure was essentiallya failure of a central counterparty in the sense that itinternalized the credit risks of its trades," he added.

He said that "approximately $180 billion of our tax dollars wentinto AIG – that is nearly $414 million per each of yourcongressional districts," although AIG last week said that theamount it now owes the American people is $83 billion.

"While a year has passed and the system appears to havestabilized, we cannot relent in our mission to vigorously addressweaknesses and gaps in our regulatory structure," Mr. Genslersaid.

But Republicans on the committee disagreed. Rep. Scott Garrett,R-N.J., argued that placing more trades on
exchanges would do nothing to prevent the chance of anothersystemic-risk
collapse like AIG and could diminish the market because certainproducts
may not be conducive for exchange trading.

Rep. Jeb Hensarling, R-Texas, argued that derivatives overallwere not the cause of the financial crisis. "Maybe derivativesdidn't work in AIG's case, but a lot of firms were spared a fatethat could be worse but that they used derivatives to limit theirrisk," he said.

In an amendment to the legislation firms would be designated asmajor swap participants if their activity would expose theircounterparties to significant losses.

The legislation also provides authority to the Securities andExchange Commission and the Commodity Futures Trading Commission toexempt firms from falling under the definition.

As passed by the Financial Services Committee, the bill mandatesthat all derivatives transactions, both standard and customized, bereported to a central trade repository. This is designed as a wayof creating price transparency in what is often an opaque market,members of the committee were told.

It also would require the Commodity Futures Trading Commissionand Securities and Exchange Commission to accept foreignregulations if they are comparable to U.S. regulation. It alsowould require that both counterparties on a particular trade toreport it to either the SEC or the CFTC.