Senate Agriculture Committee Chair Blanche Lincoln (D-AR) may unveil as early as Thursday a bill that would give only bona fide hedgers of “legitimate commercial risk” a limited exemption from the proposed regulatory requirements of the nearly $500 trillion over-the-counter (OTC) derivatives market.

Despite reports that the committee’s bill will be more rigorous than anticipated, “I’m still of the belief that manufacturers will still be exempt. I’m hopeful that the chairman sees her way to exempt manufacturers from clearing and being required to post margins,” said Paul N. Cicio, president of Industrial Energy Consumers of America.

In a letter sent Tuesday to four senators, Lincoln said the legislation would include only a narrow exemption to the requirements for trading and clearing derivatives contracts through a central clearinghouse, the New York Times reported. She said the exemption would not be available to speculators — hedge funds — but only to end-users of an asset, such as oil or natural gas, who are hedging “legitimate commercial risk.”

In addition, the Senate agriculture panel’s bill would require the reporting of all trades to regulators.

One industry lobbyist who strongly supports financial reform said his group had been expecting a moderate, “middle of the road” bill from Lincoln, but he has heard the bill described as “the most progressive legislation we’ve seen yet on derivatives.” All the details aren’t out yet, but he expected the committee staff to distribute the bill Wednesday night. He said he had heard that Wall Street financial groups were holding emergency meetings Wednesday to develop strategy.

A late afternoon report by The Washington Post has the Lincoln bill delivering a major shock to big banks, forcing them to give up their lucrative derivatives trading business if they want to remain in the banking business.

As to its chances of passage, Lincoln has the votes in committee, the lobbyist said. He pointed out that when it goes to the floor, “it’s not health care; if the Democrats can keep their caucus together, they shouldn’t have too much trouble getting a couple [of] Republicans to go with them…maybe the two Maine senators, maybe [Chuck] Grassley, [R-IA]. It looks like the agricultural industry will back the bill and they can put pressure on some Republican lawmakers. The new wild card is the Tea Party. We don’t know how they will react. They don’t have a platform. If the Republicans want to kill this, they’ll have to get the Tea Party on board, and that brings a lot of unknowns.”

While the names of the banks and other financial institutions that are fighting restrictive reform have been front page news for more than a year, the organizations supporting reform are less well known, but are spread over a very broad grass roots base. There is the Commodity Markets Oversight Coalition (CMOC), which is a broad and informal coalition of more than 450 industry and trade associations, business and consumer advocacy groups, including faith-based and social justice organizations. Another group, the Americans for Financial Reform, includes strong labor union backing, while the aviation industry is behind the S.O.S. or Stop (Oil) Speculation Now movement.

The House OTC derivatives bill, which was passed in December, carved out a specific exemption for commodity trades involving end-users or commercial traders hedging commercial risk (see Daily GPI, Dec. 14, 2009). And it provided an exemption for hedge funds, according to Cicio.

The Senate Banking Committee voted out legislation overhauling the financial regulatory system in late March (see Daily GPI, March 24). The derivatives section of the bill was regarded as placeholder language awaiting a more specific proposal from the Senate agriculture panel, which has jurisdiction over the Commodity Futures Trading Commission — regulator of the derivatives market.

At the time Susan Ginsberg, vice president of crude oil and natural gas regulatory affairs for the Independent Petroleum Association of America, said the producer group has received assurance from Lincoln and staff that their bill will provide an end-user exemption.

©Copyright 2010Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.