* Document offers new details on Sen. Lincoln swaps plan
* Parts of Lincoln plan will be included -aides
* House wants to drop Senate credit rating agency plan
* Private equity funds may face new rules
(Adds industry comment)
By Kevin Drawbaugh and Rachelle Younglai
WASHINGTON, June 14 Banks looked increasingly
likely to face some limits on swap trading as a proposal to
rein in risky business practices gained traction among U.S.
lawmakers negotiating a landmark Wall Street reform bill.
A revised proposal from Democratic Senator Blanche Lincoln
was floated on Monday to allow banks to keep parts of their
lucrative over-the-counter derivatives operations, a bid to
mollify critics who had opposed a wide ban.
While the fresh proposal would allow banks to continue
hedging their own risks in-house using swaps, it would still
force banks to spin off lucrative swaps dealing activities.
Lincoln had initially proposed a plan that could have
forced banks completely out of the $615 trillion OTC
derivatives market. The plan, once seen as dead-on-arrival, had
new life breathed into it last week after the Arkansas Democrat
won a primary election in which she campaigned against banks.
A senior congressional aide said that portions, at least,
of Lincoln's proposal will be incorporated in legislation
expected to be finalized by the end of the month by a joint
U.S. Senate-House of Representatives conference committee.
The panel will meet for the second time on Tuesday to
consider new rules for private pools of capital and credit
Representative Barney Frank, the Democrat who is chairing
the committee, on Monday called for dropping the Senate's most
controversial plan to regulate credit rating agencies.
The Senate bill would create a board to match raters with
debt issuers. The provision aims to mitigate conflicts of
interests at the largest credit rating agencies -- Standard &
Poor's MHP.N, Moody's Corp (MCO.N) and Fitch Ratings
(LBCP.PA) -- which are paid by the issuers whose debt they
rate. Instead, Frank is proposing a study of credit rating
Frank also wants to ensure that advisers to hedge funds and
private equity funds register with the Securities and Exchange
Commission. The Senate bill exempts private equity funds from
The back and forth is part of final negotiations on the
biggest rewrite of U.S. financial rules since the 1930s.
Once approved by the committee and both chambers of
Congress, the legislation would be sent to President Barack
Obama to sign into law.
Enactment would give Obama and fellow Democrats a major
domestic policy achievement to add to healthcare reform ahead
of general elections in November. Voter anger at Wall Street
has been a factor pushing Congress to act aggressively.
(For a full story on the Lincoln plan revisions, double-click
WIDE IMPACT OF LINCOLN PLAN
Lincoln's plan could have far-reaching impact for some of
Wall Street's largest and more storied institutions.
The unregulated OTC derivatives market, including swaps,
produced about $24 billion in industrywide revenues in 2009,
with an estimated 98 percent of that total generated by
JPMorgan Chase (JPM.N), Bank of America (BAC.N), Goldman Sachs
(GS.N), Morgan Stanley (MS.N) and Citigroup (C.N).
Amid concerns about profits being cut if the Lincoln plan
and other reforms are approved, bank stocks fell on Monday as
earlier broad gains on Wall Street were largely reversed.
Michael Greenberger, a professor at the University of
Maryland School of Law, said banks would still face significant
changes to their derivatives business under Lincoln's revised
proposal, since they would have to find investors to separately
capitalize the swaps entities, rather than backing the business
with capital from the bank holding company.
"They're going to have to go out and get people to put up
capital for engaging in highly risky things," Greenberger
The bill under consideration presently contains Lincoln's
initial proposal to force banks to choose between their
lucrative OTC derivatives trading desks and access to
government protections, such as emergency lending by the
White House economic adviser Paul Volcker, a former Fed
chairman, told CNBC television on Monday that Lincoln's
original proposal was too sweeping.
"The proposed legislation ... has certainly taken account
of some of the objections," he said.
According to a Senate aide, banks would only need to spin
off swaps dealing activities to an arms-length affiliate under
Lincoln's plan, but all swaps players, including exchanges and
clearinghouses, would have access to emergency loans from the
"The whole point behind this, I thought, was so that the
derivatives business did not have access to government aid. So
if you set them up separately then still give them access, I
don't see what you've achieved," said Matthew Magidson, a
lawyer at Lowenstein Sandler in New York.
(Additional reporting by Roberta Rampton, Charles Abbott,
Caren Bohan, Kim Dixon and Andy Sullivan in Washington, and
Steve Eder and Elinor Complay in New York; Editing by Leslie