Firms ranging from airlines to agribusiness would be exempt from new rules on compulsory clearing of derivatives transactions under a bill in Congress aimed at tightening oversight of the financial system.

The draft bill from Representative Barney Frank, chairman of the House of Representatives Financial Services Committee, was being circulated among lawmakers on Monday amid concern an effort to regulate the over-the-counter derivatives market could hurt nonfinancial firms that use it.

The $450-trillion market, used to hedge against risk and speculate on prices, is widely blamed for amplifying the 2008-2009 financial crisis and authorities worldwide are debating approaches to regulating it.

Frank's bill exempts swaps from new rules requiring centralized clearing that are meant to bring more visibility to the market if one of the counterparties to the swap is not a swap dealer or major market participant.

End-users of derivatives -- such as rural electric cooperatives, natural gas distributors, airlines and agribusiness -- have all voiced concerns about being forced to front collateral required to satisfy margin requirements involved in centralized clearing.

The draft begins to narrow the terms of a debate that has been going on for months about how to categorize portions of the OTC derivatives market and what to do with each category.

This is the best job they've done at defining some of the terms we've been talking about since summer, said Kevin McPartland, senior analyst at TABB Group in New York.

He said lawmakers want to minimize systemic risks to the economy from OTC derivatives, but avoid imposing unneeded costs on U.S. corporations that are not central to those risks.

That's the crux of all of this, trying to prevent and find systemic risk before it happens, McPartland said.

The proposed bill would also empower regulators to ban swaps they deem abusive, which they define as detrimental to the stability of financial markets or participants.

The draft is based partially on a bill introduced in July by the New Democrat Coalition, a group of moderate lawmakers.

Democratic Representative Michael McMahon said in a statement the draft addresses broad risks to the economy from OTC derivatives by mandating exchange clearing and trading for the majority of products, while preserving the over-the-counter market for specialized contracts.

He said he and New Democrats had worked closely with Frank's committee to address key concerns about protecting end-users.

GENSLER ON END-USERS

In late August, Commodity Futures Trading Commission Chairman Gary Gensler, whose agency will play a key role in policing OTC derivatives, proposed that more OTC derivatives should face mandatory clearing, including end-users.

Central clearing of credit default swaps, a widely traded derivative contract, is under way. IntercontinentalExchange said on Monday that it has cleared $2.3 trillion in U.S.-based CDS since March and 514 billion euro ($750 billion) in European-based CDS since July. ICE rival CME Group has said it will test its CDS clearinghouse this week.

The Obama administration earlier this year proposed clearing of standardized OTC derivatives and moving as much of them as possible onto regulated exchanges, while requiring only increased reporting for customized derivatives.

The proposal is part of a broad push by President Barack Obama and congressional Democrats for tighter regulation of banks and capital markets to prevent another financial crisis.

As the financial regulation reform initiative has unfolded this year, parts have been pared back as political reality has intruded. Regulation of OTC derivatives is still a work in progress, with numerous proposals in play.

Frank said last week his committee will deal in mid-October with OTC derivatives legislation. He predicted the panel would move a bill to the House floor by the end of the month.

The Senate has not yet taken up the issue, on which debate is likely to continue for several months.

(Additional reporting by Charles Abbott, with Karen Brettell and Jonathan Spicer in New York, and Huw Jones in London; Editing by Andrew Hay)

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