Today, the conference committee that is reconciling the House and Senate versions of financial regulatory reform is supposed to deal with one of the most contentious aspects of the legislation: reform of the derivatives market. The Senate’s text, which is being used as the base for negotiations, includes a strong derivatives title authored by Sen. Blanche Lincoln (D-AR) that would force almost all derivatives trades onto public exchanges (like the stock exchange) and through clearinghouses (which ensure that each party in a trade has adequate collateral should the trade go bad).
Lincoln’s bill also includes Section 716, which is a provision requiring banks to place their derivatives trading desks into a separately capitalized entity. It has drawn the scorn of the financial services industry, but would help protect taxpayers by ensuring that risky derivatives trading is divorced from money that is federally insured (like a bank’s deposits).
In the last few days, some House Democrats have expressed hesitation about Section 716, with one, Rep. Mike McMahon (D-NY), saying that “it would be impossible for me to vote for a bill that contains that provision.” Lincoln has, thus far, been standing tall against pressure to back down, and yesterday received some support from one of the few Republicans who voted for financial reform — Sen. Chuck Grassley (R-IA):
“I heard there was some compromise or some backing down on Blanche Lincoln’s part, and I hope she doesn’t back down,” Grassley said. “I voted for it in the Ag Committee, and it’s one of the main reasons I voted for it on the floor of the Senate.”
And while much has been made of the Democrats who are reluctant to support Lincoln, there are also House Democrats who are pushing for Section 716 to remain in the final bill. Reps. Bart Stupak (D-MI), Jackie Speier (D-CA) and Rose DeLauro (D-CT) penned a letter to the financial reform conferees telling them to “preserve the strong Senate language”:
The Senate bill includes important provisions that remove the ongoing Federal subsidy to the derivatives businesses of the five large banks that dominate this market. This language will help ensure that taxpayers are not supporting this risky activity with deposit insurance or other benefits. It will increase transparency and safety by making sure that derivatives market making activities are separately capitalized. As a result, it will also redirect bank capital towards lending and investment in Main Street, rather than empty speculation.
Rep. Barney Frank (D-MA) said earlier this week that “the essence of what Senator Lincoln wanted to do on pushing derivatives out of the banks will happen, and certainly they will be totally insulated from any insured deposits.” It seems this is one of the few ideas recently capable of garnering bipartisan support.