economics

April 22, 2010

Senate Committee Passes Derivatives Legislation

The Senate Agriculture Committee has approved bipartisan legislation that would require derivatives to be traded on regulated exchanges and cleared through central clearinghouses, advancing the financial regulatory reform effort.

Blanche Lincoln

The Wall Street Transparency and Accountability Act is intended to bring increased transparency to U.S. financial markets and will be incorporated into the larger financial reform bill that will be considered by the full Senate in the coming weeks.

“The Senate Agriculture Committee has taken a significant step toward bringing real reform to our nation’s financial markets, providing the transparency and accountability that the American people deserve in a bipartisan way, “ said committee chair Blanche Lincoln, D-Ark., in a statement. “My bill will bring the $600 trillion derivatives market out of the dark and into the light of day, ending the days of backroom deals and putting this money on Main Street where it belongs.”

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Lincoln’s bill would prohibit the Federal Reserve and the Federal Deposit Insurance Corp. from providing any federal funds to bail out Wall Street firms that engage in risky derivative deals. Banks engaging in risky swaps transactions would be forced to spin off their swap dealer desks or be barred from receiving any federal assistance.

The legislation also includes mandatory clearing and trading requirements and real-time reporting of derivatives trades. The bill’s narrow end-user exemption would allow commercial interests, such as electric cooperatives, to be able to hedge business risks, however.

Treasury Secretary Tim Geithner praised the bill. “Today, the Senate took another step towards comprehensive financial reform,” he said in a statement. “Under Chairman Lincoln’s strong leadership, the Senate Agriculture Committee voted out a bipartisan bill that will bring derivatives trading out of the dark, provide strong oversight of market participants, and combat fraud, abuse and manipulation. Chairman Dodd’s comprehensive and tough legislation has already passed out of the Senate Banking Committee. We will continue to work with Chairman Dodd, Chairman Lincoln, and Senate leadership to craft strong derivatives provisions that close loopholes, provide necessary transparency, and reduce threats to financial stability as part of a final, comprehensive financial reform bill.”

Republicans were not as enthusiastic about the bill, but appeared to be in more of a mood to work with Democrats on the final shape of the financial reform bill. Sen. Charles Grassley, R-Iowa, voted to pass the bill out of committee, but expressed reservations nonetheless.

“I’m disappointed that the legislation presented for committee action was not bipartisan,” he said. “The chairman and ranking member had worked for months for a bipartisan bill, but politics thrown into the mix by the White House derailed that effort in the end. I hope the floor debate on a larger financial reform package is different, and that good policy is put ahead of politics. Even so, I voted for the chairman’s derivatives bill today because I think transparency is the right policy. The draft isn’t perfect, and I want to fix the way a provision is written so that whistleblower protections are not weakened as a result, for example. But the Lincoln bill is an important step in the right direction for transparency and accountability in the derivatives market.”

Grassley cautioned, however, that his vote for reform of the derivatives market doesn’t mean he will vote to support the larger financial reform bill on the Senate floor. “The derivatives piece is significant, but that larger bill has a number of flaws that need to be resolved before I’d support it,” he said.  “Again, I hope the majority leadership of the Senate allows the kind of debate, negotiation and amendment process needed to make those kinds of changes so that representative government can work as it should.”

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