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Corporations criticize derivative regulation

WASHINGTON -- Cargill and the National Rural Electric Cooperatives Association said Sept. 18 that proposed regulation of financial derivatives could make it harder for them to do business, but House Agriculture Committee Chairman Collin Peterson,...

WASHINGTON -- Cargill and the National Rural Electric Cooperatives Association said Sept. 18 that proposed regulation of financial derivatives could make it harder for them to do business, but House Agriculture Committee Chairman Collin Peterson, D-Minn., said he thinks the issues for "end users" can be resolved and that he is determined to tighten up on derivatives because their misuse was a key element in last year's financial crisis.

The Commodity Futures Modernization Act of 2000 exempted many derivatives, which are insurancelike products on whether prices will rise or fall on commodities, currencies, interest rates and other business products.

The inability of American International Group to fulfill insurancelike derivatives contracts, forced the government to provide a bailout for that company because government officials were worried that its failure would bring down the world financial system. The House Agriculture Committee and the Obama administration have proposed that companies be required to set aside more capital to pay off the derivative contracts if business does not go the direction that is expected.

Risk management

John Hixon, the director of federal government relations at Cargill, testified at a House Agriculture Committee hearing that Cargill offers risk management products to bakeries to help them manage fluctuations in the price of flour and to restaurants to help them maintain stable prices for chicken, but might be forced to stop offering that service if the Obama administration proposal goes forward.

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Glenn English, CEO of the National Rural Electric Cooperatives Association, testified that rural electric co-ops use derivatives to manage currency and interest rate risk. Electric co-ops, he said, do not have a lot of extra capital and would have to borrow money to back the derivatives. The co-ops, he added, would pass along the cost to customers by increasing rates.

Peterson said at the hearing he wants to make changes in the proposal to avoid higher costs, but he added, "We are not going back to the system we had before. I want to make sure the risk out there is going to be borne by the people doing the business, not by the government." Peterson also told reporters he fears the "big players" -- big banks that sell derivatives -- are trying to get exemptions. Goldman Sachs and JPMorgan Chase & Co. are two of the biggest actors in the derivatives business.

Tightening finances

Peterson also said he worried that House Financial Services Chairman Barney Frank, D-Mass., is not moving fast enough on an overall bill to finish it this year.

"It's not acceptable not to deal with this issue this year," he said.

House members have been telling him that constituents are asking why Congress has not tightened up regulation of financial services a year after the collapse of Lehman Brothers, he added.

Peterson and Frank agreed earlier this year to a comprehensive bill and issued a joint paper on the goals for financial reform legislation in August, but Peterson said he also spoke Sept. 16 with Senate Agriculture Committee Chairwoman Blanche Lincoln, D-Ark., about moving a bill on speculation in the futures and derivatives markets independently of a larger financial services reform bill.

Noting that Commodity Futures Trading Commission Chairman Gary Gensler and Securities and Exchange Commission Chairwoman Mary Schapiro are scheduled to testify before his committee soon, Peterson said he hopes to get Lincoln, Gensler and Shapiro "on the same page in the next three weeks" so that legislation can move. He also noted that his committee has passed a futures and derivatives market reform bill and said the committee would need only a two-hour markup to incorporate Obama administration proposals and make other changes.

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