Lincoln unveils tough derivatives regulation bill

Senate Agriculture Chairwoman Blanche Lincoln, (D-Ark.), unveiled a tough draft bill today to regulate the over-the-counter derivatives market 

The measure includes mandatory clearing and trading requirements, real-time reporting of derivatives trades and closes loopholes providing "100 percent transparency" to the unregulated $600 trillion market. 

The measure will be marked up Wednesday and will be attached to a financial regulatory reform bill authored by Senate Banking Chairman Chris Dodd (D-Conn.). 

"The days of backroom Wall Street deals are over," Lincoln said. "This is the strongest Wall Street reform bill to date and represents an historic opportunity for real reform. America’s consumers and businesses will finally see a financial market that operates in an open and transparent manner.”

Earlier today, President Barack Obama threatened to veto any financial regulation reform bill that "does not bring the derivatives market under control and contain some sort of regulatory framework that assures that we don't have the same kind of crisis that we have seen in the past."

Large Wall Street firms such as Goldman Sachs, which was under the microscope Friday, have lobbied against changes to the market. 

The proposal prohibits the Federal Reserve and FDIC from providing any federal funds to bail out Wall Street firms who engage in risky derivative deals. Banks engaging in risky swaps transactions will be forced to spin off their swap dealer desks or be barred from receiving any federal assistance. 

“My proposal puts an end to 'too big to fail' and prevents future Wall Street bailouts. Financial institutions will have to decide if they want to be banks or if they want to engage in the risky financial trading that caused the collapse of firms such as AIG,” Lincoln said. 

Lincoln's committee has jurisdiction over the Commodity Futures Trading Commission, which oversees the derivatives market. 

The bill would overhaul the OTC market and require trades to go through a clearinghouse that would guarantee the transaction. The transactions must be traded on a regulated exchange, to provide further market transparency. 

The public would see what is being traded, who is doing the trading and regulators such as the CFTC and the SEC to go after fraud, manipulation and excessive speculation, according to a release. 

The proposal gives regulators the authority to close loopholes and to punish those that knowingly help clients defraud third parties or the public. The measure says that swap dealers would have a "fiduciary duty" to municipalities and pensions. 

The bill also regulates foreign exchange swaps like other Wall Street contracts, which, at $60 trilion is the second largest components of swaps markets.