Sen. Judd Gregg (R-NH) Tuesday called on the Senate to remove a provision in the financial regulatory reform bill that would require large financial institutions to spin off their lucrative derivatives desks.

“This one section is really damaging to our efforts to produce a safer, sounder, more transparent derivatives regime, which has adequate liquidity and capital behind it,” Gregg said on the Senate floor. Gregg is the ranking Republican on the Senate Budget Committee.

“The…section has to be removed from this bill,” he said. Gregg has not yet offered an amendment to strike that part of the measure. He “still is finalizing his amendment strategy,” a spokeswoman for Gregg said. She added that several of his amendments will be “aimed at strengthening the derivatives title” of the reform bill.

“Where this idea came from is hard to fathom,” Gregg said, referring to spinning off the swap desks. “It is so counterproductive to the purpose of making the derivatives market safer, sounder and more efficient.”

It’s estimated that it would cost financial institutions approximately $250 billion to set up separate swap desks, according to Gregg. And this means that capital will not be available for the creation of credit for Main Street, he said.

Gregg further noted that two of the “premiere” regulatory agencies — Federal Reserve and Federal Deposit Insurance Corporation — have come out and publicly said, “this is really, my paraphrasing, a ‘stupid idea.'”

The regulators contend that this section of the reform bill would reduce competitiveness in the derivatives markets; would be highly disruptive for banks and their customers; and would create a less stable market for regulators.

Sen. Christopher Dodd (D-CT), chairman of the Senate Banking Committee and chief architect of the financial reform bill, said getting to the “finish line on this bill is going to take some time,” and may necessitate the Senate working on weekends.

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 Daily GPI, March 24), and a bill that was passed by the Senate Agriculture Committee in April (see Daily GPI, April 22). While the Senate agriculture bill is more narrow in scope, it has caught the attention of the energy industry and Wall Street.

The bill regulates for the first time the over-the-counter derivatives market for a number of commodities, including natural gas, electricity and crude oil, as well as requires swap dealers to spin off their derivatives operations.

This “language, which was put forward by the Agriculture Committee, really undermines 1) the soundness and safety of the derivatives market and; 2) the ability of Americans to be leaders in the derivatives market,” Gregg said.

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