Obama administration downplays Lincoln’s derivatives provision

The Obama administration on Wednesday downplayed the importance of a provision in Wall Street overhaul legislation that would restrict banks’ derivatives trading.

Michael Barr, assistant Treasury secretary, told reporters that the provision to eliminate banks’ in-house derivatives operations is not among President Barack Obama’s “core” objectives for new regulations of the $600 trillion market for derivatives.

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Senate Agriculture Committee Chairwoman Blanche Lincoln’s (D-Ark.) “push out” provision has met with fierce resistance from financial and business lobbyists, Republican and Democratic senators and federal regulators, including Federal Reserve Chairman Ben Bernanke.

Barr said the president’s focus is on moving to central clearing of derivatives, increasing transparency of the market, ensuring prudential oversight of derivatives dealers and swap participants and establishing strong anti-abuse measures.

“Those four key objectives need to be met in the final bill,” Barr said. “Both the House and the Senate have strong provisions on this, and we’re going to be working to make sure that they are in conference. There are other provisions like that Lincoln provision that are not part of that core set of questions, and I think those are going to be worked through in conference.”

The House and Senate are aiming to reconcile differences between their bills before the July 4 recess. The Lincoln provision is one of the biggest; House legislation that passed in December contains nothing similar.

“Using swaps to manage risk and using depositors’ money for casino-style swap dealing are two very different things,” Lincoln said. “The Senate bill moves this risky activity out of the bank and into fully regulated entities, protecting depositors and American taxpayers.”

The derivatives market is a lucrative business for big banks. National banks recorded $23 billion in revenue in 2009 on derivatives trading, according to the Office of the Comptroller of the Currency. Five large banks represent 97 percent of the total face value of the market in derivatives, which are used to hedge a variety of risks, including changes in interest rates or the potential for an asset to default.

Many lawmakers and outside critics blame derivatives for exacerbating the financial crisis in 2008.

Barr said the effect of the Lincoln provision is “somewhat unclear” but that it could have a big impact on the banking industry.

“If it would result in banking organizations not being allowed to engage in swap transactions, the provision could have very serious consequences,” Barr said. “If it has a narrower set of interpretations, its consequences would be smaller.”

The Senate legislation includes language backed by Paul Volcker, an administration adviser, that seeks to bar proprietary trading at banks. Barr said the Volcker provision may also limit the speculative nature of derivatives trading at large banks.

“It address proprietary trading of all kinds of financial instruments, including derivatives instruments,” Barr said.

Barr and Diana Farrell, deputy director of the National Economic Council, declined to comment on the administration’s position on the Senate bill’s effort to rein in debit card interchange fees.

Senate Majority Whip Dick Durbin (D-Ill.) successfully added a provision to limit fees paid by merchants to debit card issuers, including banks and credit unions. The provision was not part of the House legislation.

“We frankly have not developed a formal position on it,” Barr said.