Senate draft: banks must spin off swaps desks

WASHINGTON (Reuters) - The derivatives reform bill being written by Senate Agriculture Chairman Blanche Lincoln would bar federal bailouts of swaps dealers and buyers and it would bring foreign exchange swaps and forwards under federal regulation.

It also would require banks to spin off their swaps desks or give up federal deposit insurance and support by the Federal Reserve, according to a summary on Wednesday.

Lincoln aimed to unveil the bill by Friday at the latest. It would stand as the most aggressive package for swaps regulation in Congress. It would require many over-the-counter derivatives to be traded on regulated platforms and to go through market-stabilizing clearinghouses.

If approved by the Agriculture Committee, the package is expected to become part of a financial regulatory reform bill already cleared for Senate debate by the Banking Committee. It puts the Senate in position to propose stricter swaps rules than the House. The reforms could cut into bank and dealer profits.

Research and advisory firm TABB Group estimates the top 20 dealers generate around $40 billion annually from over-the-counter derivatives, excluding credit default swaps.

A handful of banks are leading dealers in swaps.

According to a committee summary, Lincoln would:

--Bar a bailout of any part of the swaps network, from dealers and major participants to the exchanges the list swaps and the clearinghouses that guarantee payment on the deals.

--Require banks to spin off their swap desks or not have access to any federal assistance, such as deposit insurance or access to the Federal Reserve discount window.

--Regulate foreign exchanges swaps and foreign exchange forwards. Earlier reform plans did not call for regulation of them.

--Impose a fiduciary responsibility on swaps dealers in dealings with governmental bodies and pension plans. Regulators would have power to act against abusive swaps.

The summary followed an outline by Lincoln on Tuesday of her reform goals.

She would require reporting of all trades in the $450 trillion swaps market and require high-volume standardized transactions to be traded on regulated platforms and to go through clearinghouses.

"Systemically important institutions" would be required to submit high-volume standardized contracts to central clearing.

In addition, Lincoln would allow only "a narrow exemption" from clearing for nonfinancial "end users," who range from utilities and airlines to manufacturers, who use swaps to guarantee a supply of materials and lock in their price.

(Reporting by Charles Abbott; Editing by Bernard Orr)