Capping a full day of debate on the financial regulatory reform bill Wednesday, the Senate fought back Republican efforts to strike a provision that would force large banks and financial institutions to spin off their lucrative derivatives business.
An amendment to the broad Wall Street reform bill, offered by Republican Sens. Judd Gregg of New Hampshire, Saxby Chambliss of Georgia and Richard Shelby of Alabama, would have killed the legislation’s prohibition on any kind of federal assistance to swap dealers, such as Wall Street banks, that engage in derivative transactions. The current legislation would likely force the banks to shed most of their derivatives operations.
The amendment failed along party lines 39-59.
The Republicans sought to eliminate language crafted by Sen. Blanche Lincoln (D-AR), chair of the Senate Agriculture Committee. Lincoln’s proposal has been the target of widespread criticism, including from some Democrats, federal financial experts and Wall Street lobbyists.
Chairman Sheila Bair of the Federal Deposit Insurance Corporation (FDIC), Comptroller of the Currency John Dugan and staff of the Federal Reserve have warned of the “devastating effects” of Lincoln’s proposal, according to Gregg (see Daily GPI, May 5).
Derivatives are financial instruments whose price depends upon or is derived from one or more assets, such as energy. Their value is determined by fluctuations in the underlying value. They are mostly used to hedge commercial risk, but also can be used for speculative purposes. Some derivatives, such as agricultural commodities, are already traded on regulated exchanges. But over-the-counter derivatives are traded off-exchange and out of the purview of the Commodity Futures Trading Commission.
The legislation overhauling the financial regulatory system would change that, bringing regulation to the $600 trillion derivatives market for the first time. Most derivatives trading is handled by the big banks, such as JPMorgan Chase and Goldman Sachs.
It’s estimated that it would cost financial institutions approximately $250 billion to set up separate swap desks under Lincoln’s provision, according to Gregg.
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