Senators divided over rules on the derivatives market

Two senators charged with shaping new rules to oversee the vast, unregulated over-the-counter derivatives market said Friday that they have failed to reach agreement on the legislation, considered a crucial element of the effort to revamp the nation's financial regulatory system.

Sens. Jack Reed (D-R.I.) and Judd Gregg (R-N.H.) had spent months working through the details but could not settle on language in time for next week's scheduled debate on a wide-ranging regulatory overhaul bill. Rather, the bill introduced this week by Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate banking committee, will include placeholder language on derivatives from an earlier draft.

"Ultimately, we were not able to reach comprehensive consensus that will fill in dangerous gaps while allowing companies to safely use derivatives to hedge their risks," Reed said in a statement. "I am hopeful that there will be bipartisan support for bringing derivatives out into the open, regulating trades and ensuring that regulators have the tools to keep up with new innovations in the system."

Gregg said he felt that he and Reed had made significant progress toward reining in the shadowy derivatives market, which helped fuel the financial crisis when risky bets went bad. "Chairman Dodd's decision to move mark-up forward leaves the effort incomplete," he said in a statement. "I am hopeful that we can continue to work toward developing a final bipartisan product in this area before any legislation reaches the Senate floor."

Aides to Gregg and Reed said Friday the senators would continue negotiating.

The Obama administration and lawmakers from both parties have argued for a more transparent and standardized derivatives market, but differences remain over possible exemptions from the new rules.

Many non-financial companies, from Caterpillar Inc. to Harley-Davidson to Coca-Cola, have argued that they need specialized derivatives to manage against certain risks, including fluctuating currency exchanges, interest rates and commodity prices.

Also Friday, Dodd agreed to change language in his current bill after Federal Deposit Insurance Corp. Chairman Sheila C. Bair warned that the current draft left open the possibility for "backdoor bailouts." In a speech in Florida, Bair said that Dodd's language appears to allow the Federal Reserve to use its emergency powers to lend directly to financial firms during a financial calamity.

A Dodd spokeswoman confirmed Friday that the provision she mentioned would be removed from the current draft.