Senate moves toward combined bill on derivatives oversight

By Brady Dennis
Washington Post Staff Writer
Friday, April 23, 2010; 7:27 PM

Senate aides inched closer Friday to combining separate bills that would establish oversight of the vast market for derivatives, an effort central to the ongoing push to revamp the nation's financial regulations.

The Senate banking and agricultural committees, which share jurisdiction over parts of the derivatives market, recently passed different versions of legislation with a common goal -- bringing transparency and supervision to a market that has remained largely devoid of regulation.

Derivatives are private contracts that allow traders to bet on the direction of the prices of stocks, commodities and other assets. They also are used by companies to lock in prices for goods, such as oil, cotton or aluminum, which often fluctuate in value.

The market burgeoned in the years leading up to the financial crisis, with an estimated $600 trillion worth of deals. The result was huge profits for some Wall Street firms, but derivatives ultimately deepened the severity of the crash by amplifying risks across the system and tying the fate of companies like American International Group to firms across the globe.

The bill approved this week by the Senate Agriculture Committee, chaired by Sen. Blanche Lincoln (D-Ark.), seeks to ban big Wall Street banks from trading in derivatives. It also requires nearly all derivative contracts be traded on public exchanges and approved by a separate body called a clearinghouse.

Those dealing in derivatives would have to raise money to cover unexpected losses, in case one party to the contract defaults. Lincoln's measure is generally more favorable to food manufacturers and other commercial firms than to banks, though it does limit derivative trading by such companies.

Aides have been busy combining Lincoln's bill with the one already passed by the Senate Banking Committee as part of a broader package of proposed financial reforms headed to the Senate floor. Obama administration officials want the final derivatives language to be more balanced between agriculture and banking, aides say. They also oppose forbidding big banks from trading in derivatives altogether.

Whatever the final result of the two derivatives bills, Wall Street likely won't cheer the result. The language approved by the Senate Banking Committee was widely viewed as a placeholder that would be swapped for more lenient rules. But Lincoln's bill turned out more stringent than expected, meaning that the final version will likely will place tighter reins on derivatives trading than what the financial industry had been prepared to swallow.

One Republican, Charles Grassley of Iowa, voted in favor of passing Lincoln's bill through the committee, but other GOP members remained critical. Sen. Judd Gregg (R-N.H.), who spent months working on a derivatives bill with Sen. Jack Reed (D-R.I.) before talks stalled, said Lincoln's bill would drive the U.S. derivatives market overseas.

Most lawmakers agree that derivatives legislation lies at the heart of the current effort to overhaul the way Washington regulates Wall Street. The size, opacity and risk that existed within the derivatives market intensified nearly every aspect of the financial crisis.

Still, it remains only part of an expansive and controversial bill that has yet to attract bipartisan support. Other lingering issues include the shape of a proposed new consumer financial protection regulator, how much supervisory power to grant the Federal Reserve and how to grant the government power to wind down large, troubled firms without putting taxpayer money at risk.

Senate Majority Leader Harry Reid (D-Nev.) has scheduled for Monday afternoon a potentially divisive test vote, known as cloture, that could clear the way for formal debate on the far-reaching legislation. Democrats need at least one Republican in order to overcome the threat of a filibuster.

A flood of votes could come if the Senate's lead negotiators on the financial package, Sens. Christopher J. Dodd (D-Conn.) and Richard Shelby (R-Ala.), can reach a bipartisan deal before the scheduled 5 p.m. Monday vote. While congressional leaders remained optimistic heading into the weekend, both sides also expressed a measure of skepticism that a deal would arrive in time.

If Dodd and Shelby don't reach an agreement, a game of political chicken could commence. All 59 Democrats are expected to vote to move forward on the bill, forcing Republicans to choose whether to block the effort. Republicans have said they are prepared to block the legislation until their concerns with the current legislation are addressed.

Reid also could delay Monday's vote if Dodd and Shelby believe they are on the brink of a deal. When debate ultimately begins on the legislation, lawmakers plan to introduce dozens of amendments before a final vote.

As Dodd and Shelby's staffs continue negotiations in private throughout the weekend, the two men will make an appearance together on NBC's "Meet the Press."

Staff writer David Cho contributed to this report.

© 2010 The Washington Post Company