Senate Agriculture Committee Chair to Deliver Derivatives Regulation

The Democratic chairwoman’s proposals support financial reform of derivatives by putting them on exchanges, which has encountered opposition from banks that make billions in transaction fees on derivatives every year.

(April 14, 2010) — With support from the Obama administration, which has made this one of its priorities for the financial-regulatory bill, Senator Blanche Lincoln, an Arkansas Democrat, said she would propose legislation to the $450 trillion derivatives market. The regulations would require nearly all users of derivative contracts to trade on centralized exchanges, which would improve pricing and increase transparency.

“Speculators will not be exempted and all trades will be reported to regulators and the public,” said Lincoln, Democratic chairwoman of the Senate Agricultural Committee, according to The New York Times. Additionally, under Lincoln’s proposed changes, the Commodity Futures Trading Commission, which regulates many derivatives, would have greater oversight — any agency that is used for the trading of swaps contracts will be required to register with the C.F.T.C.

Rules on derivatives have prompted major lobbying following the 2008 global meltdown, as trading of derivatives is one of Wall Street’s most profitable businesses that have been largely unregulated until now. According to Lincoln, derivatives regulation is essential to prevent future bailouts of Wall Street. The Democratic chairwoman won support from Olympia J. Snowe of Maine, a Republican senator, who has pushed for stronger regulation of derivatives. On the other hand, seeking to guard their profits, Wall Street giants including Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley have been allegedly trying to stymie provisions of the bill. Pension funds would also be impacted by the regulation, as industry lobbyists argue it’s unfair to thwart the ability of fund executives to invest.

“Watering down and delaying reform can have a major benefit for” the banks, said Robert Litan, an economist and former Clinton administration antitrust official who now follows financial regulatory matters at the Kauffman Foundation, a nonprofit research group focused on entrepreneurship in Kansas City, The Wall Street Journal reported.

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Lincoln’s plan is expected to be unveiled as soon as the end of the week, with the Senate hoping to take up financial regulation reform by the end of the month.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742