WASHINGTON (Reuters) - Forcing most derivatives to trade on exchanges and move through clearinghouses will make U.S. markets more attractive to investors, a key senator involved in financial regulatory reform said on Tuesday.
Blanche Lincoln, the chairman of the Senate Agriculture Committee, rejected criticism from Republicans that tough swaps reforms that are part of the Democratic bill will push trade in the $450 trillion derivatives market overseas.
“I think people will gravitate to good markets,” Lincoln told the North American Agricultural Journalists conference.
Just ahead of the second test vote on the package in two days to see whether Republicans will allow it to move forward for debate, Lincoln said she didn’t know whether the most controversial part of her plan would find favor in the Senate.
Lincoln’s bill includes a measure that requires banks to spin off swaps desks to prevent taxpayer-funded bailouts for risky trades.
“You look at Goldman Sachs, you look at Morgan Stanley, they’ve done that — they’ve put affiliates underneath a holding company so that the banks are insulated from the risky activities,” Lincoln said, referring to two of the biggest players in the market, dominated by Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup and Bank of America.
“I think the simplest and easiest way is to ask them to spin it off, capitalize it in a different way, and I hope that other people will join me,” she said.
Saxby Chambliss, the Republican leader on the Senate Agriculture Committee, said dropping the spin-off provision would make the bill easier to stomach, but said he is concerned rules requiring mandatory clearing for swaps would hike costs for manufacturers and farm lenders such as Denver-based CoBank.
“CoBank is now going to be treated just like Goldman Sachs from a swaps and derivatives standpoint,” Chambliss said.
Lincoln’s bill would not allow any financial companies to be exempt from rules, which she said was necessary to prevent big players from exploiting loopholes.
Assuming the Senate passes its reform package, it will then need to be reconciled with the House version of the bill, passed in December.
Rep. Collin Peterson, chairman of the House Agriculture Committee, said differences will be ironed out by a conference committee of lawmakers.
“We don’t see any problem in getting things worked out at our level,” Peterson said, referring to the derivatives portion of the reforms.
Compared to Lincoln’s bill, the House bill has broader exemptions from clearing for end users seeking to hedge their price risk, and also has anti-speculation measures such as position limits for index funds.
The House bill did not include a requirement for banks to spin off swaps desks.