Senate Republicans last Thursday offered an amendment to strike a Democratic provision in the financial regulatory reform bill that could prohibit any kind of federal assistance to swap dealers, such as Wall Street banks, that engage in derivatives transactions.

Specifically the amendment seeks to remove Section 716 in the broad Democratic measure now on the Senate floor. Republicans said they were “unclear” when debate on the amendment would take place.

“The derivatives market in this country is a critical source of liquidity and credit that helps make the economic engine of this country run. Unfortunately, the provision included in [the Democratic] bill will do fundamental harm to our nation’s derivatives market, pushing jobs and capital overseas,” said Sen. Judd Gregg of New Hampshire, one of the sponsors of the amendment and the ranking Republican on the Senate Budget Committee.

He noted that nonpartisan experts, such as 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 the Democratic provision requiring Wall Street banks to spin off their derivatives desks in order to access federal funds (see NGI, May 3).

Senate Majority Leader Harry Reid (D-NV) said Friday that no more roll call votes on the bill to overhaul the financial regulatory system would be held until Tuesday. To save time, he urged senators to merge amendments that deal with common issues.

Reid acknowledged, however, that the “derivatives’ part of [the] bill is by some standards more complicated.”

“Our amendment simply strikes a provision that creates obstacles for those who use swaps to manage their business risks and as such need access to well-capitalized counterparties,” said Sen. Saxby Chambliss of Alabama, another sponsor of the amendment and the ranking Republican on the Senate Agriculture Committee.

“This is just [one] example of how many provisions in the underlying bill over-reach and cause unintended hardships on businesses that had nothing to do with the collapse of the financial markets,” he said.

“We need a strong derivatives title that causes more trades to be cleared and increases transparency. Instead the current bill would remove swap desks from commercial banks, lowering the amount of capital available for actual lending,” said Sen. Bob Corker (R-TN), the third sponsor to the amendment.

While Gregg and Chambliss spoke out about the derivatives portion of the reform bill last week, Senate Agriculture Committee Chair Blanche Lincoln (D-AR) last Wednesday defended the controversial proposal, which emerged from her committee, that would require Wall Street banks to spin off their derivatives desks.

“Wall Street lobbyists are doing everything to distort” a provision in the legislation that would prohibit the Federal Reserve and the FDIC from providing any federal assistance or funds to swap dealers, such as Wall Street banks, and major swap participants. This restriction would force the big banks to spin off their derivatives desks.

“The suggestion that this provision will force derivatives into the dark without oversight is absolutely false,” Lincoln said in response to claims by Wall Street lobbyists and Republicans. “Just because these swap desks will no longer be overseen by the FDIC does not mean that they will not be subject to this bill’s strong regulation by market regulators.”

She said that lobbyists estimated that the provision will move $300 trillion worth of swap activity outside of the banks. “My question is — why is this activity there in the first place.”

The Senate also is expected to take up a controversial bipartisan amendment that seeks to preserve the Federal Energy Regulatory Commission’s jurisdiction in regional electricity markets. Chairman Gary Genseler of the Commodity Futures Trading Commission believes his agency, rather than FERC, should have control of regional transmission organizations and independent system operators.

The amendment is sponsored by Sens. Reid, Jeff Bingaman (D-NM), Lisa Murkowski (R-AK), Sam Brownback (R-KS), Maria Cantwell (D-WA), John Cornyn (R-TX), Ron Wyden (D-OR) and Bob Corker (R-TN). The legislation now before the Senate is a blend of a broader financial regulatory reform bill that was voted out of the Senate Banking Committee in late March (see NGI, March 29) and a bill that was passed by the Senate Agriculture Committee in April (see NGI, April 19).

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