Wall Street reform to move on swap desks

WASHINGTON (Reuters) - The Wall Street reform law being written by House and Senate negotiators will include some splitting off of swaps desks from banks, a key House negotiator told Reuters on Tuesday.

Collin Peterson, the House Agriculture Committee chairman and a lead House negotiator on the derivatives portion of the bill, had given little sign until now of his views about limits on bank activity in the $615 trillion swaps market. The limits look increasingly likely to become part of the final bill.

Peterson expressed some solidarity with Senate Agriculture Committee Chairman Blanche Lincoln and her proposal to require banks to spin off lucrative swaps-dealing desks, which have been blamed for exacerbating the 2007-2009 financial crisis. His panel explored limits on federal aid to the swaps industry last year.

Lincoln’s office clarified on Monday the scope of the limits she proposed.

“I think there will be some splitting off of swaps desks,” Peterson said in an interview, adding that the new details provided by Lincoln were moving the issue “to a place I’d probably be comfortable with it.”

Derivatives were on the agenda for action next week by negotiators, among the final items for compromise.

Peterson said he is willing to tighten the so-called end user exemption to prevent hedge funds and similar financial entities from avoiding a requirement to send swaps through clearinghouses. The exemption is aimed at manufacturers and other nonfinancial companies.

“I am concerned that we don’t open the door to hedge funds and some of these other financials too wide,” he said. “I’m willing to look at a tightening up to get at the financials.

“We have some ideas we’re looking at,” Peterson said, adding that they would remain confidential while he discusses them with other lawmakers.

The end-user exemption is one of the major issues for over-the-counter derivatives in the financial reform bill -- “a totally open question,” said a House Republican staff worker.

The bill will require “standardized” swaps to go through clearinghouses and to be traded on regulated platforms to prevent market distress. Clearinghouses require companies to post margins against default, a potential additional cost.

The Senate-passed Wall Street reform bill has a narrower exemption from the clearinghouse requirement than the House measure approved for end users. End users are businesses such as utilities, manufacturers, airlines and distributors who use derivatives to lock in supplies at a guaranteed price.

“We clearly want to have adequate capital requirements and margin and collateral. We’re not hung up it has to be cash,” said Peterson. It could be oil wells or other assets, he said.

As negotiations began, 10 oil, natural gas and electricity trade groups said in letter to lawmakers that the bill’s language should be sharpened to treat nonfinancial end users differently than swaps dealers and investors who use derivatives to hedge risk.

Editing by Leslie Adler