–Senate Agriculture Chief Is Modifying OTC Derivatives Language
–House-Senate Conference Committee To Reconvene Tuesday
–Democratic Leaders Seek Agreement By End of Next Week

By John Shaw

WASHINGTON (MNI) – With the House-Senate conference committee on
financial regulatory reform set to reconvene Tuesday, Senate Agriculture
Committee Chairman Blanche Lincoln is offering revised language
regarding the contentious issue of regulating over-the-counter
derivatives.

Her new language does not alter the essence of her proposal
regarding OTC derivatives regulation, but phases these changes in over
two years.

Both the House and Senate regulatory reform bills require most
derivatives to be traded through third parties, but the Senate bill has
fewer exemptions for end-users. Additionally, the Senate version would
force banks to spin off their derivatives units or risk losing access to
the Fed’s discount window and FDIC insurance.

The provision which requires a bank which qualifies as a swap
dealer to “push out” its swap desk to an affiliate of the bank holding
company has attracted considerable attention–and strong opposition from
banks.

Administration officials and key congressional Democrats have also
indicated they are uncomfortable with Lincoln’s derivatives language,
but have stopped short of frontal public opposition.

Several Democrats have said that the provisions preventing banks
from buying and selling securities solely for the firm’s
profit–proprietary trading– would be a more effective tool to control
risk than preventing banks from trading derivatives.

At this point, Lincoln does not appear to be backing down from the
essence of her plan, but is now offering a two-year transition for banks
to prepare for this change.

When Lincoln addressed the opening session of the House-Senate
conference Thursday, she showed no indication of backing down from her
OTC provisions.

“Under our current system, there are a handful of big banks that
are simply no longer acting as banks,” she said.

“Currently, five of the largest commercial banks account for 97% of
the commercial banks notional swap activity. This is a huge
concentration of economic power. In my view, banks were never intended
to perform these activities in the first place,” she added.

Lincoln strongly defended her provision which requires a bank which
qualifies as a swap dealer to “push out” its swap desk to an affiliate
of the bank holding company.

“This provision does not prohibit banks from using swaps to hedge
their loan portfolios nor does it prohibit a bank from entering into a
swap when originating a loan with a customer. This provision will ensure
that our community banks on Main Street won’t pay for the reckless
behavior on Wall Street,” she said.

Lawmakers have said that resolving the OTC derivatives regulatory
issue will be one of the central challenges of the House-Senate
conference committee.

That panel hopes to craft a final regulatory reform bill by the end
of next week and pass it before the Fourth of July.

** Market News International Washington Bureau: (202) 371-2121 **

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