–Senate Debates Regulatory Reform As Private Talks Continue
–Senate Expected To Revist Derivatives Language Next Week

By John Shaw

WASHINGTON (MNI) – The Senate resumed the debate on financial
regulatory reform Thursday, with votes possible throughout the day on a
range of amendments.

The Senate is expected to consider an amendment to exempt auto
dealers from the reach of the new Consumer Protection Bureau, an
amendment to tighten oversight of credit rating agencies and an
amendment to develop an orderly bankruptcy process for non-bank
financial services companies.

It remains unclear how the debate on the underlying financial
services bill will be brought to a close — and when a final Senate vote
will be scheduled.

It now seems certain the debate will extend until next week and
that a final vote will not occur until the middle of the week at the
earliest.

A critical issue that must still be resolved is derivatives
regulation.

The Senate rejected a Republican attempt Wednesday evening to
effectively kill a package of over-the-counter derivatives regulatory
reforms that were drafted by Sen. Blanche Lincoln, the chairman of the
Senate Agriculture Committee.

In a party line vote, the Senate voted 39 to 59 against a
Republican alternative that would have replaced the
Democratically-drafted package. Lincoln’s package remains in the
underlying bill.

Several weeks ago, Lincoln unveiled a regulatory framework that
would require OTC markets to adopt aspects of the regulated markets such
as mandatory clearing through derivatives clearing organizations and
trading on exchanges or exchange-like facilities.

Her bill has a narrow exemption for commercial “end users” who use
derivatives to hedge against economic contingencies such as fluctuations
in fuel prices, currency and interest rates.

The most controversial features of the package is a provision that
requires a bank that qualifies as a “swap dealer” or a “major swap
participant” to either divest its swap desk or forego access to federal
credit assistance such as the Federal Reserve Board’s discount window of
FDIC deposit insurance.

Senate Republicans favor more disclosure of derivative swaps, but
argue that Lincoln’s amendment is a serious overreach. Some key
Democrats appear to agree, but no changes are expected to be made until
after Lincoln’s Democratic primary in Arkansas next Tuesday.

These changes are likely to be placed in a manager’s amendment that
will be assembled by Senate Banking Committee Chairman Chris Dodd and
Sen. Richard Shelby, the ranking Republican on the panel.

The underlying Senate regulatory reform bill, largely drafted by
Dodd, establishes a new independent Consumer Protection Bureau at the
Federal Reserve Board, creates a process to liquidate failed financial
firms, sets up a council of regulators to oversee systemic risk in the
economy, establishes a regulatory structure for over-the-counter
derivatives, requires hedge funds that manage over $100 million to
register with the SEC and creates a new office within Treasury to
monitor the insurance industry.

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

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