Oct. 14 (Bloomberg) -- The House Financial Services Committee revamped legislation that would rein in the $592 trillion over-the-counter derivatives market, winning praise from the Obama administration.

The panel agreed by voice vote to redefine “major swap participants,” closing what regulators had called a loophole that could exclude from oversight all hedge funds as well as large derivatives users such as Fannie Mae and Freddie Mac. The committee plans to complete action on the measure tomorrow.

President Barack Obama’s administration proposed regulatory changes in August, including imposing higher capital and margin requirements on derivatives markets and requiring certain contracts be processed through clearinghouses. The administration said it welcomed the revised version of the measure sponsored by Representative Barney Frank, the committee’s chairman.

“Today’s events indicate that the House has taken major steps toward enactment of this bill and is well on the path toward comprehensive financial reform,” Assistant Treasury Secretary Michael Barr said on a conference call with reporters.

Administration officials had criticized Frank’s original proposal at a hearing of the panel Oct. 7. That version “could unintentionally preserve existing regulatory gaps,” Henry T.C Hu, director of the Securities and Exchange Commission’s division of risk, strategy and financial innovation, said in testimony.

The committee today rejected a provision that would give regulators authority to set margin requirements. That matter will be left to the House Agriculture Committee, which has jurisdiction over the Commodity Futures Trading Commission, Frank, a Massachusetts Democrat, said.

Republicans on the panel said the measure would lead to too much government interference in markets.

‘More Costly, Cumbersome’

“I continue to be fearful that at every single step we’re making the use of derivatives more costly, more cumbersome,” said Representative Jeb Hensarling, a Texas Republican.

Among amendments the panel will consider tomorrow is a requirement that swaps dealers and their biggest customers execute derivatives contracts on regulated exchanges or trading platforms.

The provision would also bring Frank’s bill closer to Obama’s proposal.

Frank backed away today from his proposal to give regulators sweeping authority to ban “abusive swaps.”

“There was concern that a broad grant to ban abusive swaps would be unsettling,” Frank said.

Frank’s original draft bill would have given the Securities and Exchange Commission and CFTC joint authority to “prohibit transactions in any swap” that they determine “would be detrimental to the stability of a financial market or of participants in a financial market.”

Excluding ‘End-Users’

Frank’s latest plan still excludes from new rules most “end-users,” corporations that use derivatives to mitigate their operational risk, such as a rise in oil prices, or fluctuations in currency rates.

Derivatives users large enough to “expose counterparties to significant credit losses,” such as mortgage-finance companies Fannie Mae and Freddie Mac, would meet Frank’s new definition of a “major swap participant” and wouldn’t be eligible for the exclusion.

Frank said transactions with corporations that use derivatives “purely for the purpose of managing risk to their production,” won’t have to go on an exchange. Companies will still have to report prices and trading.

“There will be no more hidden trades where we don’t know the price,” said Frank.

Single Regulator

The panel approved a provision that would require the Treasury Department, CFTC and SEC to study the “desirability and feasibility” of creating a single regulator for financial derivatives. It also agreed to include language prohibiting a federal “bailout” of derivatives clearinghouses, unless Congress provided explicit authority.

The panel also adopted a provision that excludes from many of the new rules contracts executed by end-users during the 90 days before the new laws go into effect. The provision was sponsored by Representative Christopher Lee, a New York Republican.

Derivatives are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. Credit-default swaps, one type of privately traded derivative, were used to replicate pools of mortgages that banks created to sell to investors, what was known as a synthetic collateralized debt obligation.

Losses from collateralized debt obligations, including the synthetic type and securities based on pools of actual mortgages, have totaled more than $118 billion since the third quarter 2007, according to data compiled by Bloomberg. Banks worldwide have lost or written down more that $1.6 trillion since the credit crisis began in 2007.

Agriculture Committee

The House Agriculture Committee has its own version of the legislation. House Speaker Nancy Pelosi, a California Democrat, would oversee efforts by the panels to forge a final bill.

“We believe the two House committees will pass their bills later this month and Pelosi will then likely combine the two into a hybrid to pass on the House floor before Thanksgiving with Senate action not likely until 2010,” Teddy Downey, Chris Krueger, William Hederman, and Jaret Seiberg wrote in a note issued today by Concept Capital’s Washington Research Group.

To contact the reporter on this story: Tina Seeley in Washington at tseeley@bloomberg.net

Last Updated: October 14, 2009 17:28 EDT