Bill would limit banks in derivatives

Sen. Sherrod Brown (D-Ohio) wants to limit big banks from dominating the multitrillion-dollar derivatives market.

As Congress and the Obama administration push forward on a broad rewrite of the nation’s financial regulations, Brown is supporting legislation targeting conflicts of interest in the clearinghouses that stand between buyers and sellers of derivatives.

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Senate Banking Committee Chairman Chris Dodd (D-Conn.) did not include Brown’s legislation in his financial overhaul bill. Brown offered an amendment before the committee markup, but Dodd did not include it in his manager’s amendment that passed on a party-line vote, 13-10.

Brown’s push could  face an uphill battle to win support as the bill heads to the full Senate.

Financial, energy and other businesses use derivatives to hedge against a range of risks, including interest and currency rate fluctuations.

The derivatives industry has been a booming business for banks, many of which own stakes in clearinghouses. Consumer advocacy groups, labor unions and the NASDAQ exchange support greater restrictions on the ownership structure of clearinghouses.

Consumer advocates and labor unions cautioned that with big ownership stakes, banks would have power to keep derivatives out of the clearinghouses. That, they said, would limit the power of the new regulation by keeping the transactions private and opaque.

Dodd supported language directing the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), the two agencies with jurisdiction on derivatives, to look for ways to minimize conflicts of interest.

Lobbyists watching the issue closely say they expect Brown’s amendment to arise again after the recess.

“The proponents of that approach will take another run at that, maybe in the [Agriculture] Committee and then possibly on the floor. I wouldn’t be surprised,” said Cory Strupp, managing director of government affairs at the Securities Industry and Financial Markets Association (SIFMA). The association, big banks and many clearinghouses are opposed to Brown’s effort.

The amendment limits the ownership rights of bank holding companies with assets in excess of $50 billion and other large non-bank companies. The legislation would ban those firms from holding 20 percent or more of the voting shares in a clearinghouse. The rules would apply only to clearinghouses set up after the law is enacted.

Brown’s amendment is similar to language in legislation passed by the House in December. The issue was one of the hardest-fought provisions in the House bill. Rep. Stephen Lynch (D-Mass.) supported the same type of restrictions and took the fight all the way to the House floor.

The amendment passed 228-202, with 210 Democrats and 18 Republicans in support.

AFL-CIO and consumer advocacy groups supported the amendment. NASDAQ supported the legislation and hired former Ohio Rep. Michael Oxley (R) to lobby Congress.

SIFMA, NYSE Euronext and other financial firms opposed the amendment.

“It’s a terrible idea. It’s an effort to get the government to pick winners and losers in what ought to be a competitive marketplace,” Strupp said. “To the extent that there are issues, it seems to me that you ought to deal with them in a way that interferes as little as possible with the functioning of the marketplace.”


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