WASHINGTON (Reuters) - Banks would be allowed to keep their lucrative swaps-trading desks under a softened set of regulations for the $450 trillion derivatives market proposed by U.S. Senate Republicans on Wednesday.
The proposal could lead to a bruising Senate floor fight as Democrats try to advance a crackdown on the $450 trillion derivatives market as part of a sweeping rewrite of Wall Street regulations.
“It’s something we’ve been working on as Republicans, and there’s pretty general agreement on our side,” Republican Senator Saxby Chambliss, one of the amendment’s authors, told Reuters.
Senate Republican Leader Mitch McConnell and Senator Richard Shelby, the lead Republican negotiator on the larger bill, are among the 12 lawmakers who have signed on as co-sponsors.
No Democrats have yet signaled support, Chambliss said. Republicans control 41 seats in Senate, far short of the 60 votes that will likely be needed to modify the financial regulation bill.
A swap is a financial contract in which two parties exchange cash flows on debt, currencies, or other assets, usually to hedge risks; the market is dominated by interest rate swaps which were invented in the 1980s.
Credit default swaps, used to protect against the risk of debt default, have been blamed for amplifying concerns about corporate and sovereign credit quality.
Banks, which reap huge profits from swaps, have attacked the proposal. Banking regulators have expressed concerns about its impact on government oversight and bank capital.
The White House is uneasy with the swap desk provision, but has not directly addressed it.
“Quietly, we hear they are moving around opposing it, and that’s directly from people who are in the room when they meet on these things,” said a source with knowledge of the talks.
Three sources said the administration is reluctant to appear to oppose something with populist appeal.
Analysts say the measure probably will be dropped from the bill as the Senate debates amendments over the next two weeks.
Senator Blanche Lincoln, who drafted the Democratic derivatives proposal, said it was “absolutely false” that it would push swaps trading beyond the reach of regulators.
“Every swaps dealer and major swap participant will be subject to strong regulation,” she said.
As currently written, the Democratic-backed bill would effectively require banks to spin off their swaps desks.
The provision does not detail how banks would need to spin off swaps operations, but Lincoln, citing comments on her bill by economist Joseph Stiglitz, said on Wednesday banks could write derivatives through an affiliate.
“We haven’t talked explicitly about the mechanics of the bill, but today she clarified that it can be spun off into an affiliate,” Lincoln’s spokeswoman Courtney Rowe said, noting the distinction may ease some fears about the provision.
Morgan Stanley operates its swap desk through an affiliate, Rowe noted.
The 218-page Republican amendment differs from the Democratic bill by exempting more end users from requirements to send trades through clearinghouses.
It would let regulators decide which derivatives would need to pass through clearinghouses, and would not require clearing for foreign exchange swaps, forwards and options unless the Treasury department determines it is required.
Under the Republican proposal, swaps would be reported to regulators and prices and volumes would be reported to the public. Unlike the Democratic bill, it would not mandate exchange trading for swaps.
Additional reporting by Charles Abbott, Christopher Doering and Rachelle Younglai; Editing by Andrew Hay and Leslie Adler