Lincoln Considers Compromise on Swaps-Desk Provision
By Phil Mattingly
June 14 (Bloomberg) -- Senator Blanche Lincoln may modify her proposed rules on derivatives by giving commercial banks two years to push out their swaps trading desks into subsidiaries.
The compromise proposal also would allow the Federal Reserve to provide system-wide emergency assistance to swaps dealers, according to a draft obtained by Bloomberg News and confirmed by Lincoln’s office today.
The changes are aimed at clarifying questions about the original language and don’t pull back from the purpose of the measure, which is to separate commercial banking from derivatives trading, Courtney Rowe, a spokeswoman for the Arkansas Democrat, said today in an e-mailed statement.
The plan “is a strong provision that will protect depositors and get banks back to the business of banking,” Rowe said. “These clarifications will clear up any questions that exist about the intent of the provision without compromising the legislation.”
The revised language would give federal banking regulators two years to determine the impact of the measure on mortgage lending, small business lending, jobs and capital formation. The proposal doesn’t provide for any action after the study.
“It gives people more time to organize their affairs to react to this provision,” said Ian Cuillerier, a structured finance lawyer at White & Case in New York who has been tracking the legislation. “This is not an easy provision for banks to deal with.”
$28 Billion
Banking officials said the new proposal would do little to address their concerns. The five largest U.S. swaps dealers -- including JPMorgan Chase & Co. and Goldman Sachs Group Inc. -- made $28 billion from trading operations last year, according to reports collected by the Federal Reserve and people familiar with the matter.
“The restrictions under the new proposal are not much different than complete divestment,” said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington-based trade group.
The revised language would clarify that banks with access to Federal Deposit Insurance Corp. guarantees and the Federal Reserve’s discount lending window would be allowed to hold a separately capitalized swap dealer in an affiliate of the bank holding company.
Reconciling the Bills
The proposed changes attempt to address issues raised by banking regulators, including FDIC Chairman Sheila Bair, who said they were concerned that the original provision would keep banks from hedging their interest rate or currency risks. The revised language would specify that commercial banks could make use of swaps for those purposes as participants in the market without losing their federal guarantees, as long as they didn’t operate a swaps-trading desk.
The derivatives language is one part of the larger financial regulatory overhaul being completed by House and Senate negotiators, who will continue to meet this week to reconcile their bills. Congressional Democrats said they expect to have legislation ready for President Barack Obama’s signature by July 4.
The proposal remains in its early stages and hasn’t been presented to lawmakers, according to a Senate aide. Negotiators are currently scheduled to take up the derivatives language in the final days of the conference committee, said the aide, who spoke on condition of anonymity because the talks aren’t public.
Proposed in April
Lincoln, who is chairman of the Senate Agriculture Committee, in April proposed separating swaps trading from commercial banking. She has advocated for the rule in the face of opposition from federal regulators, lawmakers and banks.
The banking industry focused much of its lobbying efforts on removing the provision, including a personal appeal to lawmakers by JPMorgan Chief Executive Officer Jamie Dimon. Banking officials and regulators including Fed Chairman Ben Bernanke said the original proposal could introduce more risk into the system by eliminating a primary hedging mechanism and could restrict bank capital at a time of economic stress.
Derivatives, such as stock options, are financial instruments based on the value of another security or benchmark. Some instruments, including contracts that insured mortgage- backed bonds, have been blamed for fueling a financial crisis that led to the worst recession since the Great Depression.
Consumer advocates and labor groups -- many of the same people who opposed Lincoln in the primary election battle she won last week -- have supported the provision from its inception. Lincoln has picked up other high-profile support in recent days, including from Federal Reserve Bank of Dallas President Richard Fisher and Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City.
To contact the reporter on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net.
Last Updated: June 14, 2010 18:36 EDT |
