The Senate Wednesday passed by a wide margin a Democratic-Republican amendment that resolves a number of key financial reform issues, including the unwinding of systemically significant financial companies that are on the verge of collapse, but it did not address derivatives trading.
The vote (93-5) on the amendment (S. 3827) came only hours after Senate Banking Chairman Christopher Dodd (D-CT) and Sen. Richard Shelby of Alabama, the ranking Republican on banking panel, announced that they had finalized an agreement on several items related to the overhaul of the financial regulatory system, culminating weeks of negotiations. With these issues now off the table, there will be more time for the Senate to focus on regulation of the $600 trillion derivatives market — a divisive issue between Democrats and Republicans.
Senate Agriculture Committee Chair Blanche Lincoln (D-AR) 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 Federal Deposit Insurance Corporation (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,” Lincoln asked.
Sen. Saxby Chambliss of Georgia, the ranking Republican on the agriculture panel, has begun circulating a 220-page amendment to replace Democratic language to overhaul regulation of the derivatives market, The Hill reported Wednesday.
From the Senate floor, he said “we want to make sure…that these end-users who don’t deal in these swaps on a daily basis and [in] the kind of volumes that the banks do, are not thrown in a category of all of a sudden having to pay huge fees and huge costs.
“Because at the end of the day, we know who’s going to pay for that. It’s us, the consumers who buy the widgets and buy the automobiles,” Chambliss said.
He also spoke out against the Democratic proposal to spin off swap desks from financial institutions. “Any Wall Street Bank that’s a swap dealer, and every one of them are, is simply going to take their swaps desk and move it across the street…They’re going to be required to raise huge amounts of capital for that swaps dealer desk…If they’re going to be required to raise capital, it ought to be in the bank where they could utilize that money to loan [it] out to their customers,” Chambliss said.
And an “unintended consequence” of the bill is that “banks will not be able to access the discount window at the [Federal Reserve] because they’re all of the sudden not going to be able to borrow money from any federal entity. That doesn’t make sense [because] all of these swaps and derivative transactions…have to be cleared everyday.”
He said a swap dealer will require a large amount of cash to clear trades on a daily basis. But without access to the Fed discount window, they’re won’t be able to obtain the cash needed to clear the transactions.
Sen. Judd Gregg (R-NH) Tuesday also spoke out against the provision that would require large financial institutions to spin off their lucrative derivatives desks (see Daily GPI, May 5). He called on the Senate to remove it from the financial regulatory reform bill. A Gregg spokeswoman said he planned to offer amendments “aimed at strengthening the derivatives title.”
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