Sen. Lincoln explains the need for new derivatives trading regulations

Sen. Lincoln explains the need for new derivatives trading regulations

By Jon H. Harsch

© Copyright Agri-Pulse Communications, Inc.

Washington, June 10 – “Financial market reform is the single most important factor in our long-term economic recovery. It will be the foundation for our nation’s financial future.”

That’s how Senate Agriculture Committee Chair Blanche Lincoln (D-AR), still hoarse from her hard-fought runoff victory on Tuesday, began her pitch Thursday for tough new rules for derivatives trading. Addressing the House/Senate conference to merge the separate House and

Lincoln said that “At the heart of financial regulatory reform is reforming the over-the-counter derivatives market. Within a decade, this market exploded to $600 trillion dollars in notional value. We must bring transparency and accountability to these markets.”

Faced with Republican warnings against imposing the tough new rules included in the bipartisan derivatives bill passed by the Senate Agriculture Committee, included in the Senate-passed reform bill, and included in the merged bill being considered by the conference committee, Lincoln spelled out specifically that:

• “Clearing and exchange trading are at the heart of reform, mitigating risk, reducing leverage and forcing accountability on the derivatives marketplace. The Senate bill required mandatory exchange trading and mandatory clearing. It is critical that we maintain those provisions in the final bill.”
• “The Senate bill also requires real-time price transparency to the public and the regulators. Without robust transparency, the markets won’t function and the regulators can’t do their job. Information is power and real-time transparency gives this power to those on
  Main Street
  .”
• “The Senate bill also requires swap dealers to put the financial interests of state and local governments, retirement plans, pensions, and university endowments before their own. As Senator Shelby and Representative Bachus are well aware, swap dealers have taken advantage of municipalities all over the United States, including Jefferson County, Alabama. The Senate version addresses this problem by requiring a fiduciary duty that will help provide to
  Main Street
  the same protections that other investors already receive.”

Then Lincoln turned to what could turn out to be a very contentious issue over the next two weeks of hammering out a final “Restoring American Financial Stability Act of 2010” – separating traditional banking from derivatives trading. She said one major threat today is that “Currently, five of the largest commercial banks account for 97 percent of the commercial bank notional swap activity. That is a huge concentration of economic power. In my view, banks were never intended to perform these activities in the first place. It is this economic activity that contributed to these institutions growing so large that taxpayers had no choice but to bail them out in order to prevent total economic ruin.”

Lincoln said the goal in prohibiting federal assistance to swap entities is “First, getting banks back to performing the duties they were meant to perform – taking deposits and making loans for mortgages, small businesses and commercial enterprise. And second, separating out the activities that help put these institutions in peril. . . derivatives dealing is not central to the business of banking.”

Lincoln explained that “This provision would require a bank which qualifies as a ‘swap dealer’ to ‘push out’ its swap desk into an affiliate of the bank holding company. This provision does not prohibit banks from using swaps to hedge their loan portfolios nor does it prohibit a bank from entering into a swap when originating a loan with a customer. This provision will ensure that our community banks on

Responding to Lincoln’s appeal for new curbs on derivatives trading, Senate Agriculture Committee Ranking Member Saxby Chambliss (R-GA) said that job-generating small and mid-sized businesses need to “access capitol  and manage their risks  though use of derivatives.” He warned that the great majority of companies using derivatives which “had nothing to do with the financial crisis” should not be subjected “to the increased cost of clearing their transactions.” He warned against provisions “to unnecessarily regulate businesses that had nothing to do with creating the financial crisis that we find ourselves in today.”

House Agriculture Committee Ranking Member. Frank Lucas (R-OK) warned simply that “We should not to attempt to regulate risk out of existence.”

To read more about the first day of the House/Senate conference on the financial reform bill, go to: www.agri-pulse.com/20100610H1_Financial_Reform_Bill.asp

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