Oct. 5 (Bloomberg) -- Manufacturers such as Caterpillar Inc. and Apple Inc. wouldn’t have to post extra cash as collateral for hedging transactions under legislation proposed to tighten oversight of the $592 trillion derivatives market.

The draft bill released by House Financial Services Committee Chairman Barney Frank on Oct. 2, drawn from Obama administration proposals, would require the most common and actively traded over-the-counter derivatives contracts to be bought and sold on exchanges or processed through a regulated trading platform. It would impose new rules and collateral requirements, except on so-called end users such as Caterpillar.

The National Association of Manufacturers, U.S. Chamber of Commerce and the Business Roundtable, three of the biggest trade associations in Washington, lobbied Congress and the administration to exempt end-users from new rules and collateral requirements. End-users employ derivatives to hedge a risk to their operations, such as swings in interest rates, foreign currencies or commodities prices.

“This bill is certainly very positive,” said Dorothy Coleman, vice president of tax and domestic economic policy at the manufacturers organization, in an interview today. “It has clearer exemptions for end-users, which is something we’ve been pushing for.”

The draft would expand the administration’s exemption of end-users from collateral and clearing requirements. The administration proposal, released Aug. 11, would give a dispensation only to companies that use so-called hedge accounting. Frank’s proposal would exempt all end-user transactions and would let companies post non-cash items as collateral to satisfy margin requirements, Coleman said.

‘Most Formidable Obstacle’

“He’s done a lot for the non-bank end-users, which was his most formidable obstacle from the farm belt and manufacturing sector,” said Karen Petrou, managing partner of Washington- based research firm Federal Financial Analytics Inc., in an interview today.

The International Swaps and Derivatives Association, which represents banks and other participants in over-the-counter derivatives, is encouraged that Frank’s committee “is mindful of inhibiting the prudential risk-management activities of American companies,” Robert Pickel, the trade group’s chief executive officer, said today in a statement.

The group, whose members include JPMorgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp., will continue its “productive dialogue” with the panel, he said.

Frank’s proposal was praised by members of the New Democrat Coalition, a group of Democratic lawmakers who describe themselves as moderate and “pro-growth.”

It would reduce systemic risk while “preserving the over- the-counter market for specialized contracts,” said Representative Michael McMahon, a New York Democrat and member of the group, in a statement on Oct. 2.

$1.6 Trillion in Writedowns

Opaque financial products, including some derivatives, have contributed to almost $1.6 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg. Among fallen companies are Lehman Brothers Holdings Inc., the investment bank that filed for bankruptcy, and insurer American International Group Inc., which has been surviving on government loans.

Frank’s legislation would give the Commodity Futures Trading Commission added authority to police over-the-counter commodity swaps as well as derivatives traded on foreign exchanges.

‘Naked’ Swaps

The lawmaker backed off a proposal he was considering to ban “naked” credit-default swaps, where the buyer doesn’t own the underlying asset being hedged. The draft bill would instead give the Securities and Exchange Commission and the CFTC the power to “prohibit transactions in any swap” that regulators determine “would be detrimental to the stability of a financial market or of participants in a financial market.”

The manufacturers, the Chamber of Commerce and the Business Roundtable are bringing more than a dozen executives to Washington tomorrow to lobby lawmakers and administration officials for legislation favorable to end-users.

The groups sent a letter signed by 121 member companies to Congress Oct. 2 saying proposals to rein in abusive practices on Wall Street would inadvertently increase their own risk and costs.

Peoria, Illinois-based Caterpillar, the world’s largest maker of construction equipment, and Cupertino, California-based Apple, the maker of computers and devices such as the iPhone, were among companies signing the letter. Others included Duke Energy Corp., International Business Machines Corp. and the Boeing Co.

‘Everyday Risks’

“The corporate end-users don’t profit from these transactions, they are literally using them to hedge against the everyday risks,” said Ryan McKee, the senior director of the chamber’s Center for Capital Markets Competitiveness. McKee said about 10 percent to 15 percent of all derivatives transactions involve an end-user.

Under the bill, the CFTC would get the power sought by Chairman Gary Gensler to regulate bilateral swaps in commodities such as wheat and natural gas, and may impose position limits on speculation that takes place outside of regulated exchanges, according to the draft bill.

The measure also would give the Treasury Department the final say if the SEC and CFTC couldn’t agree on joint regulations, including setting position limits or the treatment of products that are economically similar, such as stock options and stock futures.

Frank’s legislation would extend the CFTC’s authority to any foreign board of trade offering direct access to U.S. investors on any linked “agreement, contract or transaction” that settles against any price of one or more contracts listed for trading on a “registered entity.”

‘Unintended Consequences’

Foreign boards of trade offering a linked contract would be required to set position limits, release trading data, and have rules in place to prevent market manipulation and excessive speculation.

The rules may drive investors to overseas exchanges that don’t offer direct access to U.S. investors, or to contracts in different types of grains and petroleum products that aren’t linked to a U.S. futures contract, said Jason Ungar, managing director of Gresham Investment Management LLC, an index investing firm overseeing more than $6 billion in assets.

“Grain and deliverable commodities are produced and traded all over the world,” Ungar said today in a telephone interview from his New York office. The proposed legislation may cause “a string of unintended consequences.”

Derivatives are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. Credit-default swaps are derivatives that were created primarily to protect lenders and bondholders from company defaults. Some lawmakers and regulators have said they may have been used to spread false rumors about financial companies to drive down stock prices.

To contact the reporters on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.com; Asjylyn Loder in New York aloder@bloomberg.net.

Last Updated: October 5, 2009 18:28 EDT