The Senate voted cloture Thursday, nearing the finish of its weeks-long debate on broad legislation overhauling the nation’s financial regulatory system. It was expected to hold a final vote on the bill itself as early as Thursday night or Friday.

On a two-thirds 60-40 vote with help from three Republicans — Sens. Susan Collins of Maine, Olympia Snowe of Maine and Scott Brown of Massachusetts — Democrats pushed it over the top to invoke cloture on the bill (S. 3217), which allows up to 30 hours of debate before the final vote. This came after the Senate fell three votes shy of obtaining cloture Wednesday (see Daily GPI, May 20).

The final vote will require only a simple majority of 51 votes.

“It’s been hard to get to this point,” said Senate Majority Leader Harry Reid (D-NV) after the vote. It’s been a “good debate.” He said senators would be allowed to offer a couple of “germane” amendments post-cloture.

The 1,400-page legislation, which was shepherded on the floor by Senate Banking Committee Chairman Christopher Dodd (D-CT), retains a provision that would require the big banks, such as JPMorgan Chase, Goldman Sachs and Citibank, to spin off their lucrative derivatives trading desks. This was widely opposed by Republicans, but they were unable to strike it.

This swap-desk provision, which was drafted by Senate Agriculture Committee Chair Blanche Lincoln (D-AR), would refuse the banks access to Federal Deposit Insurance Corp. (FDIC) guarantees and the Federal Reserve discount window in connection with their trading of derivatives (see Daily GPI, April 16). This language could be changed in the House-Senate conference on the measure.

Federal Reserve Chairman Ben Bernanke, FDIC Chairman Sheila Bair, Comptroller of the Currency John Dugan and Paul V. Volcker, former Federal Reserve chairman and White House economic policy adviser, spoke out strongly against Lincoln’s proposal.

The provision also has raised concerns among the bona fide hedgers of commercial risk, such as oil and gas producers, industrial end-users and manufacturers. “Our concern is it [the language] would reduce the number of counterparties with which we could trade” and the availability of capital, said Susan Ginsberg, regulatory vice president of the Independent Petroleum Association of America.

It’s estimated that it would cost financial institutions approximately $250 billion to set up separate swap desks under Lincoln’s provision, according to Sen. Judd Gregg (R-NH), who offered an amendment to strike the spin-off of the derivatives desks.

Sen. Robert Corker (R-TN) said the bill raises “great questions” about capital being tied up as a result of the major banks being required to set up separate derivatives desks. He further noted that the measure would add $17-23 billion to the national debt.

The bill seeks to curb commodities market speculation by forcing over-the-counter (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.

Derivatives are financial instruments whose price depends upon or is derived from one or more assets, such as energy. Their value is determined by fluctuations in the underlying value. They are mostly used to hedge commercial risk, but also can be used for speculative purposes. Some derivatives, such as agricultural commodities, are already traded on regulated exchanges. But OTC derivatives are traded off-exchange and out of the purview of the Commodity Futures Trading Commission.

Sen. Maria Cantwell (D-WA) voted against invoking cloture Thursday because of the leadership’s refusal to allow a vote on her amendment, which would have required all standardized swaps to be cleared.

In December, the House passed its financial regulatory reform bill, which would regulate OTC derivatives for the first time, set position limits for futures commodities trading, create a Consumer Financial Protection Agency and set an orderly process for winding down large, failing non-bank financial institutions (see Daily GPI, Dec. 14, 2009).

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