Senators’ plan would put derivatives under the Federal Reserve

Senators are considering giving the Federal Reserve power to regulate clearinghouses for derivatives in a wide-ranging financial overhaul bill.

Sens. Jack Reed (D-R.I.) and Judd Gregg (R-N.H.) have been deep in negotiations on how to impose new restrictions on the opaque and multitrillion-dollar market for derivatives that many blame for exacerbating the financial crisis.

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Gregg has been considering ways to give the central bank more authority over clearinghouses, the third-party entities that settle derivatives transactions.

“It is important that the Federal Reserve be involved in the risk management, oversight and regulation of clearinghouses,” Gregg said in a statement to The Hill.

The House passed legislation in December giving the bulk of the authority to the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).

“The SEC and the CFTC should maintain a role on governance, market structure and access,” Gregg said in the statement.

The Federal Reserve is the main regulator of the nation’s largest bank holding companies, which also are the biggest players in the derivatives market.

Derivatives transactions have been a major source of profit for the nation’s largest banks and financial institutions. In the third quarter of last year, banks took in $5.7 billion in revenue on derivatives, according to the Office of the Comptroller of the Currency. Five large U.S. commercial banks control 97 percent of the total face value of those transactions.

Banks also have major stakes in the clearinghouses, and some lawmakers have looked for ways to limit the influence of the banks.

The House passed an amendment sponsored by Rep. Stephen Lynch (D-Mass.) that limits banks’ ownership powers in an effort to avoid conflicts of interest.

The regulation of clearinghouses is one of several remaining issues in negotiations over how to boost oversight of a dark market.

It was poor trades in financial derivatives that led to the downfall of American International Group (AIG), the insurer that received $180 billion in taxpayer aid.

Sen. Bob Corker (R-Tenn.) said lawmakers were still discussing how to exempt derivatives’ “end-users,” the companies that rely on the instruments to hedge commercial risks.

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Committee Chairman Chris Dodd (D-Conn.) is moving Monday to unveil financial overhaul legislation without Republican support in an effort to pass an overhaul through his panel before the Easter break.

Meanwhile, the Senate Agriculture Committee, which has jurisdiction over the CFTC, is planning to release a discussion draft of derivatives legislation during the week before Easter break or the first week that lawmakers return.

The Agriculture panel aims to mark up derivatives legislation in April at the earliest.