Lawmakers worked late into the night thrashing out an
agreement on unifying the Senate and House of
Representatives’ financial reform bills. That
process is now largely complete and a House vote on the merged
bill has been scheduled for Tuesday.
While the final details of the agreement have yet to emerge,
it seems clear that Senator Lincoln’s proposal for
banks to be forced to move their swaps trading desks into
separately capitalised vehicles has been watered down. Reports
suggest trading which qualifies as hedging a
bank’s own risk – including at least some
trading in interest rate swaps and forex swaps, which make up
the vast bulk of the OTC derivatives market – will be
allowed to remain in-house.
The Bank for International Settlements estimated that at the
end of 2009 some $349tr of the $615tr over the counter
derivatives market in 11 leading countries consisted of
interest rate swaps. Another $100tr were forward rate
agreements and interest rate options.
Lincoln appears to have bowed to pressure from senior
Democrats – principally Collin Peterson, head of the
House Agriculture Committee – to soften her proposal,
to make the bill more amenable to Democrats representing New
York, Boston and other financial centres.
Warren Davis, a partner at Washington law firm Sutherland,
told FOi on Thursday he had heard such noises in Washington. "I
have a feeling they’ll roll her over," he said. "I
think [swaps trading] will get a cosmetic change.
She’s already agreed to weaken her bill."
Getting a bill through is further complicated by the fact
that one or two Democrats may vote against it because they
regard it as too weak.
A one-off $19bn levy to recoup some of the costs of the
reform process, applicable to banks with assets of more than
$50bn and hedge funds with more than $10bn, will be unpopular
with banks but of little lasting consequence.
Winners from the bill are the Securities and Exchange
Commission and Commodity Futures Trading Commission, both of
which will gain bigger budgets and more staff. CFTC chairman
Gary Gensler’s remit will be extended vastly to
oversee the OTC market.
Treasury secretary Tim Geithner said he was pleased with the
final result. "The bill that has emerged from conference is
strong," he said in a statement. "It represents the most
sweeping set of financial reforms since those that followed the
Great Depression. It establishes the greatest consumer
financial protections in American history.
"It prevents financial firms from taking risks that will
threaten the economy. And it provides the government with
significant new tools to better protect taxpayers from the
damage of future financial crises."
"A good day for financial reform"
The reconciled House-Senate bill must still pass a final
vote in both houses next week. "We urge Congress to carry the
momentum forward and move swiftly towards final passage," said
Geithner, as he cast his eyes forward to this
weekend’s G20 summit.
"The progress made over the past two weeks is enormously
important for the country and provides crucial momentum for
global financial reform. As the President travels to Toronto to
attend the G20 Summit, Congress has shown that America is ready
to lead by example.
"All Americans have a stake in this bill," he concluded. "It
will offer families the protections they deserve, help
safeguard their financial security and give the businesses of
America access to the credit they need to expand and
"This is a good day for them and for the cause of financial
reform," he insisted.
Those more zealous for radical reform were disappointed by
the weakening of the Volcker Rule. An amendment based on the
former Federal Reserve chairman’s idea of
forbidding deposit-holding banks from proprietary trading and
investing in hedge funds and private equity funds was agreed.
But its scope was reduced by an amendment allowing banks to
invest up to 3% of their core capital into hedge fund vehicles,
provided they are matched by a client.
For instance, JP Morgan’s Tier 1 capital was
calculated by Wells Fargo analysts in April as about $130bn
– that would mean it could put $3.9bn into hedge
Tom Osborn +44 207 779 8361 firstname.lastname@example.org