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Lincoln's "No Bailout for Derivatives" Proposal Gaining Steam -- Read it Here

June 10, 2010 - by Donny Shaw

Sen. Blanche Lincoln’s [D, AR] surprise primary win Tuesday has breathed new life into her financial reform provision to ban banks from getting government assistance for their derivatives and swap trading activities.

The provision, known as Sec. 716, is going to be at the center of the financial reform conference committee that starts today (live feed). It has generally been talked about as forcing banks to “spin off” their derivatives trading activities into separate entities, but that description makes it sound more aggressive than it actually is. This isn’t a “break up the banks” provision. The new derivatives entity would still be an affiliate under the same parent company as the bank they were spun off from.

The real effect of Sec. 716 would be to put a firewall between regular commercial banking activities and risky derivatives trading, with banks continuing to have access to government assistance via FDIC insurance and the Fed’s discount window on the commercial banking side, but without access to any government assistance for derivatives activities. The idea is to make sure taxpayers aren’t liable for banks’ risky derivatives trades when they go bad.

Here’s a link to the provision within the context of the broader bill. This is where the fight between reform advocates and the bank lobby will be taking place in the conference committee, so I’m excerpting the complete text of the provision below for you to read for yourself. I’d love to get your thoughts in the comments — does this seem to tough right now on the still-recovering banks, or do you support the bank on federal assistance for derivatives?


(a) Prohibition on Federal Assistance- Notwithstanding any other provision of law (including regulations), no Federal assistance may be provided to any swaps entity with respect to any swap, security-based swap, or other activity of the swaps entity.

(b) Definitions- In this section:

(1) FEDERAL ASSISTANCE- The term ‘Federal assistance’ means the use of any funds, including advances from any Federal Reserve credit facility, discount window, or pursuant to the third undesignated paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 343) (relating to emergency lending authority), Federal Deposit Insurance Corporation insurance, or guarantees for the purpose of—

(A) making any loan to, or purchasing any stock, equity interest, or debt obligation of, any swaps entity;

(B) purchasing the assets of any swaps entity;

(C ) guaranteeing any loan or debt issuance of any swaps entity; or

(D) entering into any assistance arrangement (including tax breaks), loss sharing, or profit sharing with any swaps entity.

(2) SWAPS ENTITY- The term ‘swaps entity’ means any swap dealer, security-based swap dealer, major swap participant, major security-based swap participant, swap execution facility, designated contract market, national securities exchange, central counterparty, clearing house, clearing agency, or derivatives clearing organization that is registered under—

(A) the Commodity Exchange Act (7 U.S.C. 1 et seq.);

(B) the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.); or

(C ) any other Federal or State law (including regulations).

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