Democrats Tuesday fell short of winning enough votes to move forward with limited debate on their sweeping legislation to reform the financial regulatory system.

The official vote was 58-41, with all of the Republicans and one Democrat — Sen. Ben Nelson of Nebraska — voting against consideration of the reform legislation. Democratic Sen. Jack Reed of Rhode Island, who supported the motion, changed his vote to “no” so he could recommit the bill for reconsideration.

Democrats needed at least one Republican to cross the aisle to obtain the necessary 60 votes to invoke cloture. But that didn’t happen, as was predicted by Senate Republican Leader Mitch McConnell of Kentucky and Sen. Richard Shelby (D-AL).

“I believe that 41 Republicans right now are going to stand together” to block the bill (S. 3217), Shelby, the ranking Republican on the Senate Banking Committee, told a group of community bankers in Washington, DC, Monday, The Washington Post reported..

McConnell echoed the sentiment. “It’s my expectation that we will not go forward with this partisan bill tomorrow [Monday]. That will stimulate the kind of continued discussion” between the two sides, he said on Fox News Sunday.

In a letter to McConnell last week, Senate Majority Leader Harry Reid (D-NV) and Sen. Christopher Dodd (D-CT) called on him to “reconsider your approach and…work with us on this much needed reform.” Reid and Dodd accused Senate Republicans of being “more interested in mischaracterizing the legislation and protecting Wall Street.”

The broad financial regulatory reform bill, which was voted out of the Senate Banking Committee in March (see Daily GPI, March 24), would include a measure that would regulate the $600 trillion opaque derivatives market for the first time. The over-the-counter (OTC) derivatives bill was approved by the Senate Agriculture Committee last Wednesday (see Daily GPI, April 22).

The agriculture panel’s legislation seeks to curb commodities market speculation by forcing OTC derivatives trades onto regulated exchanges and clearinghouses. It makes an exemption to the trading/clearing requirement for large commercial traders who use derivatives to hedge the risk associated with trading of physical products.

The bill includes a provision that would significantly restrict the trading of large banks — such as JPMorgan Chase & Co. and Goldman Sachs Group — by forcing them to spin off their lucrative derivatives trading operations.

Sen. Judd Gregg (R-NH) blasted the agriculture proposal that would require large banks and other swaps dealers to set up independent swap desks, saying it would hurt the “financial vitality” of the U.S. economy and would cause a large number of derivatives customers to go offshore “almost immediately after passage of this bill.”

The agriculture panel bill expressed an “antipathy” toward the large financial houses and derivative users, Gregg said, adding that it “tries to eviscerate the use of derivatives in our economy.”

The legislation clarifies that the trading/clearing exemption would apply to end-users (and their affiliates) who use OTC derivatives to hedge the risk associated with all commodities, as well as the manufacturers of goods.

Financier Warren Buffett also is seeking to exempt existing derivatives contracts from the proposed margin requirements, The Wall Street Journal reported. Buffett’s Berkshire Hathaway has a $63 billion derivatives portfolio, according to Barclays Capital.

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