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Lincoln, Chambliss Take Over Derivatives Reform

April 2, 2010 - by Donny Shaw

Now that health care is done, the next big issue Congress will take up is reforming regulations of the financial market. Most of the attention paid to financial reform so far has been on two areas — addressing the problem of too big to fail and consumer protections for financial products. Both important, but there’s a lot more to the bill that people aren’t talking about.

For example, the bill is expected to at least partially reverse the Commodity Futures Modernization Act of 2000 and restore some transparency to the over-the-counter derivatives market. Sounds arcane, but it’s actually a really big deal and it goes to the heart of what turned a mortage crisis in 2008 into a systemic financial crisis.

Don’t know what over-the-counter derivatives are? Basically, they are bets that are made between two parties (investment banks and clients) on the value of other assets, like stocks, bonds, or even home mortgages. “Over the counter” refers to the fact that the deals are executed privately, directly between two parties with no transparency, no oversight, and pretty much no regulation.

Anyways, Senate Banking Committee Chairman Chris Dodd [D, CT] has divided up his committee into several bipartisan teams of two to hash out deals and details on the different elements of financial reform in order to create a bipartisan bill. That strategy hasn’t exactly worked out — so far, no Republicans are supporting the Banking Committee bill — but derivatives reform has been given over to a new team of senators that may still be able to strike a deal. Washington Post reports:

Committee Chairman Blanche Lincoln (D-Ark.) and ranking Republican Saxby Chambliss (Ga.) plan to shepherd a bipartisan bill through their committee soon after Congress returns from its two-week April recess. Lincoln said in a recent speech that she expects the legislation to be incorporated into a wide-ranging package, spearheaded by the Senate banking committee’s chairman, Christopher J. Dodd (D-Conn.), aimed at revamping the nation’s financial regulatory system.

The Lincoln-Chambliss effort is significant because the two senators on the banking committee whom Dodd had assigned to tackle derivatives oversight, Jack Reed (D-R.I.) and Judd Gregg (R-N.H.), spent months working through the details but recently reached an impasse in their negotiations. The massive bill that recently passed Dodd’s committee on a party-line vote includes placeholder language on derivatives from an earlier draft.

If Lincoln and Chambliss strike a workable bipartisan deal on derivatives — a goal that has eluded other lawmakers — it could help push Dodd’s legislation across the finish line. At the same time, some industry officials, who spoke on the condition of anonymity because they continue to lobby lawmakers on the issue, said they expect that legislation headed up by Lincoln could be more favorable to the financial industry than the language currently in Dodd’s bill.

This is a substantial shift to the right from the original pair that was tasked to deal with derivatives. Reed is a solidly progressive Democrat; Lincoln is perhaps the Democrats’ most conservative member. Gregg is in the top ten for most moderate Republican senators; Chambliss is in the top five for most conservative.

From the same WaPo article, here’s Lincoln speaking recently at a Chamber of Commerce event on derivatives reform:

She said she supports transparency in the derivatives market and requiring clearinghouses to approve and back most deals to guard against systemic risk. But she also said she would try to avoid duplicative regulation.

“The swaps market will be regulated, but let me say this,” Lincoln said. “I don’t believe in overreaching or regulation for regulation’s sake. We must be surgical with how we regulate.”

I’m going to continue following derivative reform and writing about it on this blog. I’ll of course be covering other elements of financial reform as well, but I’ve taken an interest in derivatives for two reasons: it is a huge and systemically important market that flies almost completely under the media radar, and reforming derivatives has to do with transparency. Reform will be judged on the extent to which derivatives are required to be traded publicly on exchanges. Reform advocates are pushing for exchange trading of all derivatives, banks are arguing that clearing is enough and that exchange trading is unnecessary, and the financial reform bill passed by the House (H.R.4173) requires exchange trading on its face, but includes an enormous loophole that makes the requirement meaningless. The future of derivatives reform now rests in the hands of Sen. Blanche Lincoln [D, AR] and Sen. Saxby Chambliss [R, GA]. Stay tuned.

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