The controversial provision in the financial regulatory reform legislation that requires major banks to spin off their swap desks appeared to be intact at the end of last week, although pressure was mounting to strip the provision from the bill.

The derivatives provision, crafted by Senate Agriculture Committee Chairman Blanche Lincoln (D-AR), is considered the hot-button issue in the nearly 2,000-page sweeping overhaul bill. And, for that reason, it likely will be the last item that House and Senate negotiators try to reconcile. The conference committee is expected to take up the issue this week.

The legislation calls for the swaps desks of major commercial banks to be “separately capitalized,” and it gives banks a two-year transition period to spin off their swap desks. The bill would mostly affect the big Wall Street banks, such as JPMorgan Chase, Goldman Sachs and Citibank, requiring them to either shed or spin off their lucrative derivatives trading desks (see NGI, April 22).

Banks that refuse to isolate their trading desks would be denied access to Federal Deposit Insurance Corp. (FDIC) guarantees and the Federal Reserve discount window.

“Pressure is mounting on lawmakers to scale back the tougher Senate approach on derivatives as that section of the bill is due to be debated [this] week,” Dow Jones reported.

Forty-three members of the New Democrat Coalition, a group of moderate lawmakers in the House, have come out against the Lincoln provision banning commercial banks from engaging in swaps trading.

In a letter to the House-Senate conference committee last Wednesday, coalition members said they were joining forces with former Federal Reserve Chairman Paul Volcker, current Federal Reserve Chairman Ben Bernanke, Treasury Secretary Timothy Geithner, Securities and Exchange Commission Chairmwoman Mary Schapiro and FDIC Chairwoman Sheila Bair “who have all expressed opposition to Senate Section 716 — also known as the ‘swaps desk spinoff'” — because it “would increase systemic risk by forcing derivatives transactions into less regulated and less capitalized institutions and impede effective regulatory oversight of the derivatives markets.”

The Democrat coalition also urged the conference committee to follow the language in the House bill when it comes to end-users who use derivatives to manage their commercial risk. The House measure would grant end-users an exemption from the requirement that all derivatives be cleared and traded on public exchanges.

A group of 21 community and regional banks wrote to Lincoln asking her to exempt them from the provision that would force banks and other large derivatives dealers to spin off their swaps desks.

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